New law firm financial data signals trouble could be on the horizon

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REUTERS/Marcelo Del Pozo

The combination of falling demand for legal services and rising salaries and overheads has created financial headwinds for law firms in 2022, according to a second-quarter analysis of industry data released Monday. .

The Thomson Reuters Law Firm Financial Index, a quarterly composite score of demand, spending, rates, productivity and other economic indicators at large and midsize law firms, fell to its lowest ever low level in the last quarter since its inception in 2006.

This marks a dramatic change from a year ago, when the index hit an all-time high due to growing demand in business practices. The index has fallen in each of the past four quarters.

Law firms are not yet feeling a significant financial pinch, thanks in part to a nearly 5% rate hike, but the numbers are a warning sign that 2022 could be the end of the recent financial boom for law firms. lawyers, according to an analysis released Monday. with the last digits of the index.

“At the moment, most companies are doing very well,” said William Josten, head of corporate legal content at the Thomson Reuters Institute, which is part of the same parent company as Reuters. “The problem is that there are factors which, if left unaddressed, could have very negative consequences for businesses in the future.”

Demand for law firm services fell half a percentage point from a year ago, fueled in large part by a nearly 1% drop in demand from businesses. Demand for mergers and acquisitions was particularly slow, falling nearly 5%, according to the index. Productivity also fell by almost 4%, he added.

Meanwhile, law firm spending continues to rise. Direct spending, the bulk of which is attorney compensation, was more than 12% higher in the second quarter of 2022 than a year ago.

First-year associate salaries now start at $215,000 at most of the largest US law firms. These companies also distributed several rounds of bonuses intended to retain the partners sought.

Overheads have also increased as more companies return to the office or implement hybrid work schedules, according to the index.

Office spending is up nearly 40% from a year ago, while recruiting spending nearly doubles, according to the index. Spending on technology was also up almost 11% year over year.

“I don’t think we are in a position to top the performance of 2021,” Josten said. “But I also don’t think we’re in any great danger at this point of having a disastrous year.”

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