Law firm profits take a hit after blockbuster year - Reuters
Sheets of former U.S. President Abraham Lincoln on the five-dollar bill currency are seen through a magnifying glass at the Bureau of Engraving and Printing in Washington March 26, 2015. REUTERS/Gary Cameron
(Reuters) - Law firm profitability slowed in the first quarter of 2022, new figures released Monday showed, with ballooning expenses carving away at gains in both demand for legal services and lawyer billing rates.
Overhead costs such as recruiting and marketing climbed nearly 10% over the past year, while direct expenses—namely lawyer pay—shot up more than 13%, according to the Thomson Reuters Institute’s latest Law Firm Financial Index.
The index, previously called the Peer Monitor Index, tracks economic indicators at large and midsized law firms. The index score, which is based on a composite of factors, hit its lowest point since the third quarter of 2009—a steep decline that may take many people by surprise given how busy lawyers and firms are.
“If you ignore the expense categories, this would be a remarkable quarter,” said William Josten, manager for enterprise legal content at the Thomson Reuters Institute, which is part of the same parent company as Reuters. “But you can’t ignore the expense categories—particularly the direct expenses which are attorney compensation and benefits—because those are up so substantially, and so is headcount. Every associate costs more money, and there are more of them.”
Associate compensation increased 12% year-over-year at all firms, and more than 17% at Am Law 100 firms, according to the report. Firms on average spent 121% more on recruiting last quarter than in the previous year, though Josten noted that recruiting accounts for a relatively small percentage of firm overhead expenses.
By most indicators, 2021 was one for the record books. All of the 100 top-grossing U.S. law firms tracked by American Lawyer reported gross revenue growth, buoyed by high demand in M&A and other transactional work. That demand led to a talent war that pushed starting associate salaries from $190,000 to $215,000 at many major firms, on top of numerous bonuses.
The first-quarter report also suggests shifting demand for legal services, with transactional practices cooling somewhat and litigation—which had a lackluster 2021—beginning to gain momentum. Demand for litigation in the first quarter was up slightly more than 2%, according to the report. That’s a good sign, though litigation demand has not yet returned to pre-pandemic levels, Josten said,
Meanwhile, corporate demand was up 2%, which is a smaller increase than the last three quarters of 2021. M&A demand fell nearly 6% in the first quarter, while real estate demand increased almost 8%. Many firms have invested heavily in their transactional practices over the past five years, meaning any slowdown in work could hit them hard, Josten said.
“Corporate is looking fairly strong, but we still want to keep an eye on it,” he said. “When you look at it on a month-by-month basis, demand gradually cooled over the quarter.”
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source: https://www.reuters.com/legal/legalindustry/law-firm-profits-take-hit-after-blockbuster-year-2022-05-09/
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