2015: A 5-Minute State of the Union

Another year is over, another just beginning. As US law firms close their accounts for 2015, law firm leaders and partners are taking stock of how they did. And how their competitors did. So where do we stand when it comes to U.S. law firms’ financial performance in 2015? In this post, I highlight key themes emerging from the Georgetown Law/Peer Monitor 2016 Report on the State of the Legal Market*.

Didn’t demand for law firm services grow in 2015?

No, demand was essentially flat in 2015 (based on research by Thomson Reuters Peer Monitor involving 143 firms) continuing a pattern set in 2008.

Demand grew in corporate and real estate but other practice areas saw negative growth in demand, including bankruptcy, labor and employment, litigation and patent litigation and tax.

The overall decline in litigation demand was in the Am Law 200 firms. Strongest demand growth was in Am Law 100 firms.

But wait, didn’t U.S. law firms increase hiring in 2015?

Yes, by 1.3%, broadly the same rate of growth in numbers as 2014.

So, how productive were firms in 2015?

The modest growth in lawyer numbers and the flat demand contributed reduced productivity (billable hours worked ÷ total number of lawyers). This downward productivity trend started in 2011 and has been more pronounced in senior attorney ranks.

How did firms do in terms of rates and realization in 2015?

U.S. firms continued to raise their rates although post-recession rate increases have been slowed as against pre-2008 increases. In 2015, the rate increase was a “modest” 2.7%.

Client resistance to rate increases has itself increased and realization rates have “plummeted” according to the report. The big issue is the “worked rate” (in other words, the rate actually charged for work done): Worked rate growth has slowed. Combined with lower realization, this meant a “sharp slowdown in the growth of collected rates across the market” last year.

And, expenses?

U.S. law firms kept expenses in check. Across most expense categories, any increase was modest.

But weren’t firms more profitable in 2015?

The report confirms that “across the market as a whole, firms increased their overall revenue by 3.5%” and increased profits per equity partner by 4.6% in 2015. That sounds good BUT the spread in financial performance was significant and while some firms did very well, others performed “exceptionally poorly”.

OK, so what lies ahead?

In the face of continuing economic pressure:

  • Increasing segmentation of the legal services sector with law firms, collectively, losing market share to corporate legal departments and alternative service providers. And, to make matters worse, the Big Four accounting firms have made a comeback in some markets when it comes to the provision of legal services.
  • Increasing segmentation of law firms – the gap between the highest performing firms and others in the Am Law 100 and Am Law 200 gets wider every year.
  • A continuing “fixation on growth versus market differentiation and profitability” even if that may not make sense as a strategy since “there is no correlation between size and profitability”.

For some firms, 2016 will see increased efforts to innovate when it comes to pricing with underlying changes to staffing and legal work processes and collaboration with other service providers. The report concludes, however, that the majority of firms has little appetite for change and is locked in a “denial driven inertia”.

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*This post is based on the 2016 Report on the State of the Legal Market issued jointly by the Center for the Study of the Legal Profession at Georgetown University Law Center and Thomson Reuters Peer Monitor. It reviews the performance of U.S. law firms. It’s a great report and recommended reading for anyone interested in the legal services industry. You can download a copy here.