M&A is hot. Litigation is not. What's next for law firms in 2022?

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REUTERS/Toby Melville
  • The latest Peer Monitor Index details a strong fourth quarter for large and midsized law firms
  • But rising associate pay and potential slowdowns in demand or rates could create headwinds in 2022

(Reuters) - Law firms ended 2021 with a bang. Key economic indicators including demand, billing rates, and productivity were all up in the fourth quarter, cementing a blockbuster year for much of the industry.

But not every practice area is booming, and rapidly rising expenses tied to associate pay could leave firms in a precarious position should the market slow in 2022, according to the latest Thomson Reuters Peer Monitor Index, which tracks economic data among large and midsized law firms.

“If M&A or corporate work starts to cool, or rates are unable to keep up with the current pace of inflation, or realization starts to drop—or any combination of those things—the overall economic picture could change very quickly,” said Bill Josten, manager of strategic enterprise in thought leadership for the Thomson Reuters Institute.

Transactional work is largely fueling law firms’ economic boom. Demand for corporate work was up nearly 8% in the fourth quarter of 2021 compared to the previous year, while M&A was up 4% and tax grew nearly 3%, the Peer Monitor data shows.

Real estate saw the largest year-over-year demand growth at 11%—an increase Josten attributed to a weak 2020, a boom in residential properties and turmoil in commercial real estate tied to the pandemic. Compared to 2019—the last pre-pandemic year on the books—corporate work was up more than 10% in the last quarter of 2021.

On the flip side, litigation saw lackluster year-over-year demand growth of just 2.5%, and demand for bankruptcy lawyers fell nearly 9% from the previous year. Litigation demand was even weaker when compared to 2019, down 1%, according to Peer Monitor, which shares the same parent company as Reuters.

Though demand and rates were each up about 4% overall in the fourth quarter and productivity was up about 1%, rising expenses were a drag on law firm finances. Direct expenses—the bulk of which are related to compensation—rose more than 8%. And overhead expenses, including office costs and marketing, jumped nearly 6% over the previous year.

Rising direct expenses were fueled primarily by associate pay increases, Josten said, and those costs are poised to jump again in the first quarter of 2022 as salaries continue to rise.

“Firms are in a very strong position and things look very favorable, but there are a lot of factors where conditions could change,” Josten said.

(NOTE: This story has been updated to add a link to the Peer Monitor Index report in the second paragraph.)

Read more:

Law firms had another big quarter, but associate pay is taking a toll

N.Y. law firms raise starting salaries to $215,000 as lawyer pay race continues

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Karen Sloan reports on law firms, law schools, and the business of law. Reach her at karen.sloan@thomsonreuters.com