The legal industry is facing a challenging climate in 2023, with falling demand, declining profits, and rising expenses, according to a new report from the Thomson Reuters Institute and the Center of Ethics and the Legal Profession at Georgetown Law. Based on financial data from 170 large and midsized U.S. law firms, the report found that profits per equity partner at large and midsized law firms fell 4.2% over the 12 months ending in late November 2022. This is the first full-year decline in law firm partner profits since 2009. The decline in profits was accompanied by rising inflation, leaving partners feeling “significantly less well-off” than they did during the banner year of 2021.
The report found that demand for law firm services fell 0.1% by the end of November 2022 after growing 3.7% in 2021. The contraction was primarily driven by declines in transactional work and general uncertainty about the economy’s direction. Lawyer productivity also hit a more than 20-year low, with attorneys at large and midsized firms billing an average of 119 hours per month, down from 122 in 2021.
The report found that law firms also face high attorney headcounts following a 2021 hiring boom, which has driven a more than 10% increase in direct expenses. This has led to layoffs at some firms, including Cooley and Goodwin Proctor, two large firms that bulked up in 2021 to meet demand, and New York firm Stroock & Stroock & Lavan, which laid off nine “non-partner” attorneys and 18 business professionals. As the year progressed, report author Jim Jones predicted more layoffs, stating, “I think it’s quite possible, and maybe even likely. If you look at the economics, firms are in a tight squeeze regarding their expense ratios.”
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However, Jones also noted that the declines in 2022 were partly a correction after many firms experienced an unprecedented boom in 2021 when profits hit historical highs and demand was robust. Midsized law firms have reason to be optimistic in 2023, he said. They saw a smaller decline in demand than larger firms and were the only market segment with a demand increase in non-transactional practices, indicating that clients are looking for lower-price options.
In conclusion, the legal industry is facing a challenging climate in 2023, with declining profits and rising expenses leading to layoffs at some firms. However, the report also notes that the declines in 2022 are partly a correction after an unprecedented boom in 2021 and that midsized law firms have reason to be optimistic in 2023 as clients are looking for lower-price options.
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REFERENCES:
Law firms face daunting 2023 amid falling profits and demand
https://www.reuters.com/legal/legalindustry/law-firms-face-daunting-2023-amid-falling-profits-demand-2023-01-10/