Since 2001, the legal industry has been characterized by double-digit profit growth, strong demand, solid productivity and controlled expense growth. That all started to change in the second half of 2007, and now, the first half of 2008 looks very different from the previous six years.
In a trend that started last year, expense growth this year has stayed relatively high, driven largely by continued growth in lawyer head count. But revenue growth was the weakest it’s been in the seven years since American Lawyer began tracking quarterly results. Demand for legal services was also the weakest seen in the period from 2001 to 2008.
Because law firms continued to add lawyers to their ranks despite the drop-off in demand, firms experienced a slowdown in productivity comparable to the second quarter of 2001 and lower than every other second quarter between then and now. All told, for the first two quarters of 2008, profit margin compression — that is, expenses increasing faster than revenue — was the greatest it’s been in the last eight years.
The slowdown is hitting the most profitable firms the hardest. In the first half of 2008, demand dropped off even more dramatically and expenses increased at a more rapid pace at the top firms, resulting in even greater margin compression and a steeper drop in productivity than experienced by their less profitable rivals. The practice areas that normally provide a lift in a downturn — restructuring, bankruptcy and litigation — have not helped cushion the drop-off in transactional work.