law firms
Firms face a year of “mixed results and growing uncertainty,” according to a new State of the Legal Market report.
Image from Shutterstock.
Amid economic uncertainty, the legal industry will continue to grapple with falling demand and productivity, along with rising costs and inflation, according to a report released on Tuesday.
“We’re still going to end the year with projected earnings that, while down year over year, are still pretty healthy on a historical basis,” said James W. Jones, senior fellow at the Center on Ethics and the Legal Profession at Georgetown University Law Center and the lead author of the State of the Legal Market 2023 Report: Mixed Results and Growing Uncertainty. “But I think by 2023 it’s about whether what we have is really sustainable, and I think you can make a pretty strong argument that it’s not.”
The report, published by the Thomson Reuters Institute, drew on data from 170 US-based large and medium-sized law firms.
In a press release, the institute said respondents “had fairly good financial results” in 2022, but cautioned that companies face significant roadblocks in 2023, including “slacking demand, lower optimism about customer spending, higher spending, falling… productivity, weaker realization and inflation.”
For example, the report found that partners’ earnings per equity fell for the first time since 2009, falling 4.2% in 2022.
According to the report, firms are also dealing with “stubbornly high” expenses – direct and overhead costs caused by the increased number of lawyers.
This increased headcount, combined with falling demand for services, has resulted in record low productivity. The average attorney billed $98,000 less in total fees compared to the average attorney in 2007, based on 2022 rates.
The report suggests that BigLaw firms face another uncertainty due to falling demand for services, which fell an average of 0.1% through 2022 – with a precipitous drop in demand for transactional activities such as mergers and acquisitions.
According to the press release, demand for BigLaw’s services “is likely to end the year in negative territory compared to the robust 3.7% growth recovery for all of 2021.”
According to Jones, companies may need to think strategically about how some customers might bypass larger companies and transfer their business to mid-market and boutique companies. According to the report, midsize companies are competitive in the areas of litigation, labor and employment, and intellectual property.
“It’s something that we really haven’t focused on that much,” says Jones. “And if these trends towards [market] The segmentation will continue, this will be a very important part of everyone’s strategic alignment.”
Corporates hiked rates by 4.8% through November 2022. But inflation and a decline in collections realization could wipe out those gains. The report suggests that realization rate growth “has begun to level out or decline across all segments of the market,” according to the release.
“This decline may indicate that businesses trying to get back to ‘business as usual’ are losing some of the billing and collections focus they developed during the pandemic,” the report said. “But it could also indicate that customers, feeling their own inflationary pressures, are contesting bills more frequently and aggressively, or simply slowing down their payment cycles. In any case, it is a cause for concern.”
William Josten, senior manager at the Thomson Reuters Institute, believes companies need to look at their operations and efficiency rather than whether they are charging their customers higher fees.
“This year will be critical for companies not to abandon the financial hygiene and accounting discipline practices they have adopted over the past two years,” says Josten. “The financial discipline that companies have exercised in recent years has undoubtedly worked to their advantage.”
