Industry analysis from Thomson Reuters: London calling
This aritcle was also featured as an industry analysis in the October 2016 issue of Briefing. To read the issue in full, download Briefing.
The general sense among law firms in the UK is that 2016 is a better year than 2015 so far – particularly for firms from the US operating in London. The most recent data from Thomson Reuters Peer Monitor tends to substantiate those feelings, although there are still signs that continued caution should be part of any firm’s strategy moving forward.
Hours up
Bucking what has become an international trend, the London offices of US firms saw positive performance in nearly all key performance categories for the first half of 2016. It has been nearly universally true that demand for legal services from large law firms, defined as total hours worked by those firms, has stagnated, if not declined, in recent years. But the firms in our sample saw average growth in demand at almost 3% through the first half of the year, driven by an average demand increase of nearly 7.3% for the first quarter of the US financial year. This strong performance helped to boost fees worked (demand hours multiplied by negotiated billing rates) by 4.9% in 2016 so far – which comes in spite of a modest increase in worked rates of 1.3%.
The one key performance measure that should cause some concern is the measure of utilisation, calculated as hours worked by all timekeepers divided by the number of lawyers. This measure at the average firm has slipped by 1.2% in 2016 so far. While positive demand performance has put firms in a good position, the average firm hired more lawyers than demand could accommodate, and so continued the trend of overcapacity observable for some time now.
While a mere 1.2% contraction in utilisation isn’t cause for great concern, it’s certainly an indication that overcapacity remains a market concern. Firms need to remain vigilant with regard to their hiring practices to ensure that increases in headcount don’t outstrip demand by too great a margin.
But while success is encouraging, it has been far from universal. An examination of the demand results for various practice areas is a good example. Many practice areas continue to struggle in 2016, showing negative demand growth in the year to date. Modest growth in corporate and litigation in the second quarter, of 1.5% and 0.5% respectively, combined with substantial growth in bankruptcy work (up almost 24% in the second quarter alone), spurs on the sample’s encouraging results.
Rates of success?
Another area to watch will be rates. A healthy increase in standard rates at the beginning of the year hasn’t translated into improved worked rates performance so far this year. In order to explain the difference, standard rates are the ‘rack rates’ for services offered by the firm – the quoted rates. Worked rates, on the other hand, represent the actual rates paid by clients after discounts and negotiations. The fact that standard rates have grown at a faster pace than worked rates indicates that firms are offering larger discounts as a way to win new business, or that clients are pushing back harder on the rates they’re willing to pay, or a combination of the two. It’s notable that worked rates haven’t increased appreciably since the final quarter of 2014. Growth in worked rates over that period has hovered at around 0.1%.
As worked rates stagnate, realisations also suffer. Although realisations were up slightly for the first half of 2016, this still represents a net decline from where they sat just a year ago, halfway through 2015.
Based on average rate performance, it appears that the firms experiencing success are seeing it as a result of market share growth, driven by demand growth rather than by charging more.
Shares of success
On balance, the market seems to be showing firms in our sample favourable conditions. Average key performance indicators are trending favourably. There is variation, but a greater proportion of firms in the sample experienced positive demand growth than saw contraction. A third of firms in the sample saw overall demand grow by more than 10% for the first half of the year. However, that’s offset by another 21% that saw demand shrink by more than 10%.
The success of US-based firms in the UK may be cause for concern among some UK lawyers – but the fact these firms are experiencing favourable conditions indicates a set of conditions against which all firms operating in London can succeed. The trick for these US-based firms is to hold on to the success they’ve found. The goal for UK competitors is to decide how to capture a share of that success for themselves.
