Firms may need to reconsider how technology shapes productivity as law firm market returns to profitability according to Thomson Reuters
Thomson Reuters, a global content and technology company, issued a new report showing that the law firm market closed out 2023 strongly and returned to profitability, rebounding from a challenging 2022. The Q4 2023 Thomson Reuters Law Firm Financial Index (LFFI), powered by Financial Insights, reported that improved demand and slowing talent costs helped drive profitability amid questions about the impact of technology on productivity.
While productivity fell, it was the smallest decline since 2021. The report noted that while billable hours per lawyer continue to drop, “advances in technology have allowed lawyers to put more value in their hours.” The report suggested that generative AI could accelerate this trend and force firms to change how they evaluate the performance of lawyers as well as firms themselves.
After weathering costly competition for talent in recent years, firms significantly slowed their direct expense growth by keeping salary growth and year-end bonuses in check while reducing incoming fall associate classes. Direct expenses saw their slowest growth in more than two years.
Demand was up by an average of 1.7%, driven largely by growth in counter-cyclical practices, including litigation, bankruptcy, and labor & employment – practices that tend to perform better in challenging economies. The strength in counter-cyclical practices more than made up for weakness in transactional practices, such as corporate work including M&A, tax, and real estate. Litigation, in particular, saw its strongest quarterly performance in more than two years.
Worked rates rose 6.5% in the fourth quarter, the highest increase since the Global Financial Crisis of 2008-09. In addition, rate growth followed an unusual pattern in 2023; it accelerated throughout the year beginning at 5.5% in the first quarter and rose each following quarter.
The net result: the law firm market returned to profitability in 2023 after seeing profits contract in 2022. However, profits were not as strong as in 2020 and 2021, when profits-per-equity partner soared by double-digit percentages.
“Law firms showed resilience in 2023, taking advantage of shifts in market demand and aggressively raising rates while exercising restraint in costs, particularly talent costs for associates,” said Tommy Williams, interim general manager, Global & Large Law Firms, Thomson Reuters. “This balanced approach of managing for both topline growth and cost controls paid dividends for firms, and if they continue to successfully execute on those strategies, the market is well positioned to potentially continue its profitability growth in 2024. In addition, this year will likely bring more discussion about how generative AI will impact firm operations and lawyer productivity, as discussed in the Future of Professionals report, which found that 55% of legal professionals expect using AI will lower costs for firms and drive greater firm profitability.”
A copy of the Q4 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.
