Thomson Reuters Report Reveals Major Shift in Legal Market Dynamics
Is the justification for increasing legal chargeout rates beginning to weaken? It’s been widely accepted that rate hikes are essential for law firms to stay profitable but recent trends and research are challenging this belief with half of the General Counsel in the Thomson Reuters survey saying they planned to shift legal work to more affordable law firms, shifting the legal market dynamics.
The Thomson Reuters 2024 Report on the State of the Legal Market, released on Tuesday, reveals that despite significant rate increases, these are not sufficiently offsetting decreased productivity in major law firms. A key issue is the growing difficulty in collecting higher fees from clients.
The report was based on data surveyed by Thomson Reuters from 179 US-based law firms, including 48 Am Law 100 firms, 49 Am Law second hundred firms, and 82 midsize firms.
Furthermore, there’s an even more significant adverse effect of these rising rates. In a discussion with Law.com’s Andrew Maloney, Bill Josten, the strategic content manager for Thomson Reuters, shared insights from interviews with General Counsels (GCs).
Josten that 50 percent of them plan to shift their legal work to more affordable firms within the next year, a trend Josten described as “relatively remarkable.”
The outlook for 2024 is positive, with a slight rebound in corporate work expected and 40 percent of corporate general counsel planning to increase outside legal spend.
Shift in Law Firm Power
The shift in power from law firm to client could be exacerbated by generative AI, the report recorded, citing a hypothetical scenario in which clients derive a disproportionate share of its benefits by getting greater leverage in competitive pricing and an increased ability to bring work in-house.
The report also noted a shift in client power post-2008 financial crisis, with clients enforcing budget caps and reducing costs. Firms have been slow to adapt to these changes, which were somewhat mitigated by strong transactional demand growth.
Shifts in law firm dynamics have occurred since the financial crisis and are challenging traditional law firm models, favoring adaptable firms.
Increased Demand for Legal Services
In 2023, the US law firm sector saw a 7.3 percent revenue growth due to higher rates and demand, the report showed.
The report categorized firms into Am Law 100, Am Law second hundred, and midsize groups, all of which significantly increased their fees in 2023, a trend not seen since 2009.
Yet, profitability was affected by productivity losses, with lawyer headcount growing faster than demand. Elevated expenses and difficulties in bill collection also impacted profitability, with firms on average collecting only 90.5 percent of their worked rates, often adjusting bills downward proactively.
Am Law 100 firms saw a slight profitability increase in 2023, while Am Law second hundred and midsize firms experienced negative profitability for the second year, although with some improvements.
The demand for legal services grew modestly overall, varying across firm types, with midsize firms experiencing the highest growth, partly due to clients moving work to smaller firms for efficiency and better value.
However, with the decline in the transactional market, law firms have seen a shift towards ‘counter-cyclical’ practices like litigation, bankruptcy, and labor, with litigation demand reaching a 15-year high in 2023.
James Jones, the report’s lead author, emphasized the need for law firms to adapt to these market changes. The report also discussed the potential impact of generative AI in shifting power from law firms to clients, but noted that many firms are finding ways to use AI to enhance efficiency and client service.
Different law firm segments are adopting varied staffing strategies, with larger firms cutting back on associate headcount and midsize firms increasing theirs.
The report’s conclusion is that law firms better at reading market trends, managing staffing, and investing in technology and staff development perform better.
