07 Nov 2022

Lawyer profitability declines for third consecutive quarter as demand wanes and expenses rise

Firms may face increased pressure to cut headcount this year to reduce costs, Thomson Reuters says

A digital chart showing a decline

Profit-per-lawyer is on a three-quarter downturn Shutterstock

Global law firms saw lawyer profitability fall for a third quarter in a row in the three months to the end of September, according to a new report by Thomson Reuters.

Profit-per-lawyer fell 2.9% to just under an average of $320,000, having been roughly $340,000 in the final quarter of 2021, according to Thomson Reuters Q322 Law Firm Financial Index (LFFI). That was the lowest level since the first quarter of 2021, though 17.6% above pre-pandemic levels. The index – which indicates the direction of law firm profitability – remained at its lowest level on record, having previously declined for four quarters in a row.

Falling profits also coincided with rising expenses and a decline in billable hours. Direct expenses rose 10.9% and overheads rose 12.8% in the third quarter, while lawyers clocked up the fewest hours at any point over the past year (118 a month, compared to 122 in Q2).

Mike Abbot, head of the Thomson Reuters Institute, said: “Law firms are finding themselves squeezed by both slowing demand and rising expenses. While firm profits have slid recently, they still remain well above pre-pandemic levels. The lessons from the Great Recession are still on the minds of law firm leaders and they recognise the importance of taking a long-term view on how to best position their firms for ongoing success. But doing so may present some near-term challenges.”

Demand fell by 0.7% in the third quarter compared to a year earlier, with most practices areas seeing a decline. M&A advisory work slumped 13.7%, followed by bankruptcy (-10.7%), tax (-3%) and real estate (-2.9%). Labour and employment was one of the only practice areas that saw any demand growth in the third quarter, edging 0.3% higher. And while rate growth jumped 4.8%, surging inflation globally (hitting double figures in the UK in September), means rate growth contracted in real terms.

Thomson Reuters said the report suggests firms are adopting a ‘wait it out’ strategy, continuing seasonal hiring, avoiding layoffs and absorbing the costs of hiring talent and return-to-office expenses. Thomson Reuters said firms may be remembering the challenges of rehiring staff after mass-layoffs during the 2008 financial crisis. However, the report noted that law firm leaders could face mounting pressure in the fourth quarter to make cuts to headcount to bring expenses under control.

Last week, Law.com reported that Kirkland & Ellis had let go of a number of corporate associates in Texas following performance reviews

The index relies on data drawn from major law firms in the United States and key international markets. Click here to access the full report

Top