A Thomson Reuters report has shown an uncertain year ahead for law firms with profits and demand for legal services dipping, while expenses – include salary scale issues – continue to rise.
The report claims further layoffs lie ahead, as we have reported in the past week with layoffs from two major Big Law firms.
The profits per equity partner (PEP) for both large and mid-sized firms fell over 4 per cent in the 12 month period until November, according to the Thomson Reuters Institute and the Center of Ethics and the Legal Profession at Georgetown Law.
The report is based on a survey of 170 large and midsized US law firms, although reports from the UK have also sounded a similar alarm at the potential for the same drop in profits and potential layoffs.
After growing 3.7 per cent in 2021 the demand for law firm services dropped marginally by the end of last year, due mainly to a drop in transactional work and economic uncertainty.
Lawyer productivity also saw a drop – the largest in 20 years – with average billings at 119 hours per month, which was down from 122 hours in 2021.
The other issue for law firms has been the cost of hiring legal talent, which has seen a price war, particularly in London, where US law firms have outbid their major UK rivals for newly qualified associates and with their Associate payouts.
But higher salaries among the big law firms have certainly continued on both sides of the Atlantic.
But the US has been no different in terms of bonus payments as big law salaries continue to grow, law firms reluctant to let go of the lawyers they paid so much to obtain in the first place. The lessons from the GFC, when many younger lawyers were made redundant only to then be sought-after with the economic recovery, remains fresh in the minds of the law firms.
Report author Jim Jones was reported by Reuters as seeing more layoffs ahead.
“I think it’s quite possible, and maybe even likely,” he said in an interview Monday. “If you look at the economics, firms are in a tight squeeze in terms of their expense ratios.”
He noted however that the 2022 declines were in part a result of the correction from the boom days of 2021 when there was high demand and higher profits.
The mid-sized firms were also experiencing lower declines that their big law counterparts, with clients being more fee-sensitive and seeking out lower prices as well as having non-transactional work that was less affected.