The profitability of global law firms has continued to decline amid “falling demand and rising expenses”, according to a study.
The Thomson Reuters Institute has predicted that law firm executives would have to cut staff if the trend continues, with trading partners also facing the prospect of reduced payouts.
Even though lawyers remained more profitable than before the pandemic, “those gains are rapidly dissipating as time goes on in 2022,” according to Thomson Reuters Law Firm Financial Index.
Profits per avocado fell 2.9% in the third quarter of this year, bringing them back to the lowest level since the start of 2021, but still ahead of the figure at the start of 2020 by 17%.
Direct expenses, which include salaries, increased nearly 11%, and general expenses increased nearly 13% in the third quarter of 2022, “in part due to the return to the office”.
Demand fell slightly in the quarter compared to the same period last year, by 0.7%, after falling 0.5% in the previous quarter. However, in some practice areas, it fell with much larger margins, such as 13.6% for mergers and acquisitions and 2.9% for real estate.
Thomson Reuters said it was a fourth straight decline in profitability “from the healthy highs seen in the second quarter of 2021 and gives a good indication of where law firm profitability is headed.”
He continued, “As we race toward the end of 2022, this quarter’s number may point to the many tough decisions law firm leaders will face in the next year and beyond.”
For now, law firms were trying to “wait”. Thomson Reuters said: “With fresh memories of the difficulty of rehiring talent, law firms appear poised to accept some short-term productivity contraction; however, the sharp contraction in productivity in the third quarter weighs heavily.
As a result, executives were “likely to face increasing pressure to make cuts where they can find them”, and financial partners “could receive annual payments that are expected to be significantly lower, on average, than those of the government.” ‘last year. “.
This would “potentially put businesses under immense pressure to rein in spending by cutting staff, much like in 2008-09”.
But since then, law firms have evolved, with the growing presence of unassociated executives making firms “more adept at strategic decision-making,” as the pandemic has shown.
“Law firms that are able to retain and develop talent, rather than discard it, could emerge from a short period of economic uncertainty stronger than their rivals,” Thomson Reuters said.
“This, however, assumes that any further economic turmoil is relatively mild and bearable. If not, these same companies will find themselves making deeper cuts than they may have done in the past. ‘origin.
The only sector to show positive growth was employment, where demand rose 0.3%. It fell in litigation by 0.4%, in intellectual property by 0.8%, in companies by 1.9%, in taxation by 3% and in bankruptcy by 11%.
Hours billed per lawyer per month are down from the previous three quarters, at all levels. For partners, the total rose from 122 to 119 compared to the same period last year, and for partners from 133 to 128.
Despite the “gloomy picture” of the quarter, the researchers said mid-sized law firms “saw demand and revenue grow at the fastest pace in the market, an historic rarity,” capitalizing on “the most more robust” in employment and litigation, while transactional work has declined.
Mike Abbott, director of the Thomson Reuters Institute, said: “Law firms are finding themselves squeezed by both slowing demand and rising spending. Although corporate profits have fallen recently, they remain well above pre-pandemic levels.
“The lessons of the Great Recession are still fresh in the minds of law firm leaders, and they recognize the importance of taking a long-term view on how best to position their firms for continued success. But this can present short-term challenges. »