Law firms slow hiring to curb expenses: Thomson Reuters law firm financial index
Smaller incoming fall associate classes rein in expense growth as demand and rates rise
Thomson Reuters, a global content and technology company, issued a new report indicating law firms have slowed their fall hiring of new lawyers to curb expenses as demand for legal services continues to recover. The Q3 2023 Thomson Reuters Law Firm Financial Index (LFFI), powered by Financial Insights, shows firms may be setting themselves up for a year-end push for profit growth.
This year, firms have markedly reduced their annual fall hiring of new associates. In particular, Am Law 200 firms have brought in their smallest fall associate classes since 2020. Firms are seeking to reduce direct expense growth, which while slowing, remains stubbornly high, rising 6.4% in the third quarter as measured on a rolling 12-month basis. Meanwhile, overhead expenses were up 7.0%. With demand and rates growing, firms are looking to further trim expenses to support profit growth.
Demand for law firm services was up 0.1% in the third quarter – the third consecutive quarter of growth; it would have been even higher, but the quarter had one fewer working day than the third quarter of 2022. Counter-cyclical practices, which tend to perform better during periods of economic weakness, continued to be among the strongest practices, as they have been for much of 2023. These include bankruptcy, litigation, and labor & employment, which were up 6.0%, 2.0%, and 1.1%, respectively. Regulatory and intellectual property were also up, rising 1.9% and 1.0%, respectively.
In addition, rate growth continued to accelerate, rising 6.3% to a post-Great Financial Crisis high for quarterly growth. This is somewhat counter to historical norms; typically, firms tend to set rates in the first quarter and essentially lock in rates for the rest of the year. So far, rate growth has accelerated since the first quarter of this year. Firms also saw realization improve in the third quarter when compared to Q2, ending six consecutive quarters of decline and resuming the usual seasonal pattern of improving as the year goes on. However, billing and collection realization were still lower than in the third quarters of 2021 and 2022.
“Restrained hiring to reduce expenses and aggressive rate strategies are positively impacting both the top and bottom lines, helping firms set themselves up for what could be a strong finish to 2023,” said Paul Fischer, president, Legal Professionals, Thomson Reuters. “Firms also need to consider the impact of the rapidly growing use of artificial intelligence (AI) tools on their hiring strategies. As the recent Future of Professionals Report discussed, AI may have major effects on how legal work is conducted, desired skill sets for new lawyers, and the creation of new career paths and law firm service offerings.”
A copy of the Q3 2023 LFFI report can be downloaded here.
The LFFI, produced by the Thomson Reuters Institute, is a composite index of law firm market performance using real-time Financial Insights data drawn from major law firms in the United States and key international markets.
