New law firm financial data signals trouble may be on the horizon

Picture taken November 16, 2014. REUTERS/Marcelo Del Pozo

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  • Demand for firm services fell while costs rose in the second quarter of 2022
  • The Thomson Reuters Law Firm Financial Index hits record low

(Reuters) – The combination of falling demand for legal services and rising pay and overhead costs has created financial headwinds for law firms in 2022, according to a second quarter analysis of industry data released Monday.

The Thomson Reuters Law Firm Financial Index, a quarterly composite score of demand, expenses, rates, productivity and other economic indicators at large and midsize law firms, fell to its lowest point this past quarter since its 2006 founding.

That marks a dramatic shift from a year ago, when the index hit an all-time high due to soaring demand in corporate practices. The index has fallen in each of the past four quarters.

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Law firms are not yet feeling a significant financial pinch, thanks in part to a nearly 5% increase in rates, but the numbers are a warning sign that 2022 may be the end of law firms’ recent financial boom, according to an analysis released Monday with the latest index figures.

“At the moment, most firms are doing just fine,” said William Josten, manager for enterprise legal content at the Thomson Reuters Institute, which is part of the same parent company as Reuters. “The concern is that there are factors lining up that—if left unattended—could have very negative consequences for firms going forward.”

Demand for law firm services fell half a percentage point from a year ago, fueled largely by a nearly 1% decline in corporate demand. M&A demand was particularly slow, falling nearly 5%, the index found. Productivity also declined nearly 4%, it said.

Meanwhile, law firm expenses continue to rise. Direct expenses, the bulk of which are lawyer pay, were more than 12% higher in the second quarter of 2022 than a year ago.

First-year associate salaries now start at $215,000 at many of the largest US law firms. These firms have also doled out multiple rounds of bonuses meant to retain in-demand associates.

Overhead expenses have risen as well, as more firms return to the office or implement hybrid working schedules, the index found.

Office expenses were up nearly 40% compared to a year ago, while recruiting expenses nearly doubled, according to the index. Technology spending was also up almost 11% year-over-year.

“I don’t think we’re in a position to top the performance of 2021,” Josten said. “But I also don’t think we’re in great danger at this point of having a disastrous year.”

Read more:

Law firm profits take a hit after blockbuster year

NY law firms raise starting salaries to $215,000 as lawyer pay race continues

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