Law firms' demand slump deepened at the end of 2022. Is a rebound coming?

(Reuters) - U.S. law firms ended 2022 with a whimper thanks to a worsening drop in client demand, declining productivity and rising expenses, a new report found.

Demand was down 3.9% in the fourth quarter, while productivity fell more than 7% year-over-year, according to the latest edition of the Thomson Reuters Institute’s Law Firm Financial Index, released Tuesday. The index tracks key financial metrics across 170 large and midsized law firms.

Lawyers billed an average 112 hours per month in the fourth quarter of 2022 — down from 121 hours the previous year. Every practice area tracked by the index saw a decline in client demand over the fourth quarter of 2021.

Demand for M&A work was down nearly 17%, followed by real estate, which was down 11.5%. Demand was down by 10% for both bankruptcy and tax practices. Profits per partner declined 4.5% over the past 12 months, the index found.

Firms now face an “unsustainable” situation in which there is not enough work to occupy the attorneys they raced to hire in 2021, according to the report.

“It was a rough quarter,” said William Josten, manager for enterprise legal content at the Thomson Reuters Institute, which shares the same parent company as Reuters.

Still, Josten pointed out that demand for legal services fell just 0.6% in total over the course of 2022 — meaning the most dramatic declines came toward the end of the year.

Law firm finances have been like a pendulum, he said, swinging dramatically between a dismal 2020, record-breaking profitability in 2021 and a challenging 2022. And there are concrete signs that the pendulum could be swinging in a positive direction already, Josten said.

Increases in direct and overhead expenses are slowing, due largely to lawyer pay remaining stable after a year of significant increases in 2021, he said. Billing rates continue to steadily climb, and transactional work is poised to pick up as interest rates stabilize and inflation moderates, the report said.

“We know a lot more about the challenges we face — they are coming into focus so firms can more effectively plan for those impacts,” Josten said.

Read more:

Law firms face daunting 2023 amid falling profits and demand

Law firm profit slowdown continued in Q3, but midsized firms saw growth

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