A new report indicates tougher times ahead for law firms as they take a gloomy approach to looming recession and declining M&A activity.
The report from Thomson Reuters showed that the Thomson Reuters’ Law Firm Financial Index (LFFI) remained at its all-time lowest score, exacerbating concerns for how 2022 will end in the third quarter.
“For the second consecutive quarter, the Law Firm Financial Index (LFFI) returned to the worst score recorded in the Index’s history. This represents the continuation of a five-quarter fall from the prosperous peaks seen in Q2 of 2021 and gives a strong indication of where law firm profitability is headed,” the report said.
“As we rush towards the end of 2022, this quarter’s number may point to the many difficult decisions facing law firm leaders going into the next year and beyond.”
The key takeaways for the third quarter show that increased expenses and slowing demand has seen the drop in the third quarter score.
Both direct and overhead expenses grew at higher levels and inflation and strategies relating to the return to the office saw overheads rise and created concern for many law firms.
There has also been a contraction in transactional work, in particular M&A work but including tax, real estate and corporate work, particularly at the top end of the market, and non-transactional work remained flat. The problems were even more difficult as many firms had leveraged themselves towards handling more work of this nature during the pandemic.
We have previously reported on headwinds affecting law firms’ profitability and revenues, but the trend is set to continue.
To add to the list of law firm concerns has been a drop in productivity, by the largest margin since the beginning of the pandemic, the survey showed.
Productivity reductions were especially worrisome because of dramatic losses in hours per lawyer
“Yet even with productivity’s obvious shortfalls, lawyer growth did not slow, as firms continued their seasonal hiring. Consequently, the decision to cut headcount going forward likely weighs heavily on the minds of many law firm leaders.
However there was evidence that midsize law firm growth would continue and grow faster than ever, which the survey report said was a “historical rarity”.
“In the face of falling transactional demand, labor & employment and litigation work proved to be some of the more robust areas of Q3, and many Midsize law firms were able to capitalize on this development.”
“Another area with a relative positive outlook was rate growth, in which we saw rates grow across the segments at a faster pace than in Q2. These gains, unfortunately, were not enough to overcome inflation and thus the real gains were less than impressive.
“Throughout Q3, it seems that firms have decided to weather some short-term losses in this harsh environment in hopes of a more promising future. For now, that promising future sits in the shadow of profit per lawyer (PPL) declines; and this quarter saw the third consecutive slide in PPL.”