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Law firms face multiple challenges in 2012, not the least being the pressure on expenses says a new report from Thomson Reuters and Citibank.

Law firms are facing “a year of challenge and uncertainty” in 2012, forcing them to scramble to find innovative solutions in the face of soft demand and increasing costs, according to a new report from Reuters

The forecast was released Wednesday in the annual client advisory by the Hildebrandt Institute, a division of Thomson Reuters, and the Law Firm Group at Citi Private Bank.

“The revenue dynamics will likely not be as dire as 2009, but we have yet to see firms address the current pressure on expenses,” Law Firm Group chairman Dan DiPietro said in a statement.

Last year began with early signs of recovery in the legal market, but growth in demand for legal services slowed during the latter half of 2011, particularly in corporate and transactional practices, the report found. Overall, the legal industry ended 2011 with only modest growth in demand compared to 2010, and productivity actually declined, according to the report.

And it seems unlikely that demand will skyrocket in the near future — creating an uncertain environment for law-firm leaders already grappling with client pushback against fee increases.

Overall, firm profitability is expected to grow modestly in 2012, and this year may prove to be even more challenging than 2009, the report found.

One consequence of the uncertain climate has been the decrease in the number of associates employed at top-tier firms over the last decade, according to the report. In 2001, 85 percent of top-tier firm lawyers were associates, while 7 percent were listed as income partners.

In 2010, the percentage of associates working at top-tier firms had dropped to 73 percent, while income partners rose to make up 11 percent of the firms’ lawyers, according to the report. At middle-tier firms, the drop in associates was even steeper, from 78 percent of the firms’ lawyers in 2001 to 63 percent in 2010.

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One of the most serious side effects of the four-year lag in the legal market has been the “adverse impact it has had on young lawyers,” the report said. Associates were heavily hit by layoffs in 2009 and 2010, and risk-adverse clients are hesitant to put their affairs in the hands of green lawyers, according to the report.

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