Thomson Reuters: law firm financial index report reveals challenges ahead for firms to meet 2021 successes
- Demand and rates showed solid growth in the first quarter
- Lawyer compensation continued to rise sharply, up 17.3% for Am Law 100
- Overhead expenses surged from 2021 lows
Continued growth in demand and rates were no match for surging expenses in the first quarter of 2022. The growing competition for talent and a rebound in overhead expenses after last year’s steep cuts took a toll on law firm profitability, according to the Thomson Reuters Law Firm Financial Index (LFFI) powered by Peer Monitor/Financial Insights.
Demand was up 2.7% compared with a year ago. Real estate practices were strong. Litigation, which had been lagging even while other practices were recovering last year, was up 2.2%. Corporate practices saw a 2.2% gain, despite a 5.7% decrease in M&A work, which powered much of the law firm market’s gains throughout 2021. Meanwhile, worked rates were up a solid 5.0%.
However, law firm profitability dropped markedly as a result of higher expenses, including the increasingly expensive competition for talent, as well as challenging comparisons with last year’s record profits.
“The first quarter saw strength in demand and rates that would be the envy of almost any pre-pandemic quarter,” said Mike Abbott, head of the Thomson Reuters Institute. “But last year’s sharply reduced overhead expenses provided a significant tailwind that boosted profitability. As those expenses return towards historically normal levels, profitability continues to grow, but at levels nowhere near the outsized gains seen in 2021. The ongoing competition for talent is also contributing to the drag on profits.”
Direct expenses shot up 13.1% in the first quarter, compared with last year, as a result of continuing increases in lawyer compensation. Associate compensation rose 12.1%, and for Am Law 100 firms, was up a sharp 17.3%.
Overhead expenses rose 9.9%, driven by huge increases in recruiting, marketing and business development, and office expenses – three areas that saw some of the steepest declines in spending during the depths of the pandemic. Despite the bounceback, overhead expenses per FTE remain below pre-pandemic levels.
A copy of the Q1 2022 LFFI report can be downloaded here.
The Law Firm Financial Index, produced by Thomson Reuters, 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. For more information on the LFFI, part of the Thomson Reuters Financial Insights platform, visit legal.thomsonreuters.com/en/products/strategic-insights.
