The large law firm market stumbled in the second quarter, stung by a combination of slumping demand, rising expenses and falling productivity. As a result, the Thomson Reuters Peer Monitor Economic Index (PMI), which measures the relative health of the large law firm market, dropped 4 points to 48 in the second quarter—its biggest drop since the first quarter of 2013.
Demand—as defined as the growth in billable hours—for large law firm services fell for the first time in nearly three years, declining 0.9%. Before the second quarter, demand had increased for a remarkable nine consecutive quarters dating back to the first quarter of 2014—the longest such streak since the 2008-09 recession.
Productivity, which has been steadily declining for several years, saw its biggest drop in the last three years, falling 2.8% as firms faced both falling demand and rising headcount. Firms have been adding to headcount throughout 2016, with growth in the second quarter reaching its highest point since the second quarter of 2012. The growing headcount is leading to a widening gap between demand and capacity, while at the same time increasing costs for firms. In addition to direct expenses related to headcount, overhead expenses are also rising, reaching their highest growth rate since 2008.
Worked rate growth—which are the negotiated rates as determined by the matter value (sometimes called “agreed rates”)—increased slightly to 2.9% during the second quarter.
Among the practice areas, transactional practices, which had been among the market leaders over the past several quarters, were generally lower. Corporate work was nearly flat, up only 0.1%. Real estate dropped 2.3%, while tax work declined 3.4%. Litigation continued its long-term decline, falling 1.8%.
Patent prosecution was one of the few bright spots for the quarter, rising 0.2%. Labor and employment fell 0.3%. Bankruptcy was down 1.8%.
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“After a promising start to the year, the second quarter saw disappointing performance by large law firms,” said Mike Abbott, vice president, Client Management and Global Thought Leadership, Thomson Reuters. “The market broke its lengthy string of consecutive quarters of demand growth. Coupled with overhead expenses rising at their fastest rate since the recession, firms are now seeing increasing pressure on their profitability. Firms continue to grow headcount, even in the face of weakening demand for law firm services, and need to bring their capacity and costs under control to better reflect current market conditions.”
The PMI is produced by Thomson Reuters, and is a composite index of law firm market performance using real-time data drawn from major law firms in the United States and key international markets. A PMI of 65 or greater indicates strong law firm market performance.
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