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In an endeavor to bolster profitability and counteract the persistent rise in direct expenses over the past three years, U.S. law firms have taken a cautious stance on hiring first-year associates this fall. This move comes to light in the Thomson Reuters Institute’s recent Law Firm Financial Index, raising questions about the prospects for a profitable year ahead.
Profits and the Am Law 100
The report, published on Monday, indicates that the 100 most profitable firms in the U.S., often called the Am Law 100, are set to conclude the year with profit growth. However, the trajectory of midsize law firms and Am Law 200 firms is diverging, with the former expected to maintain profits similar to 2022, while the latter might see a dip in earnings compared to the previous year.
Declining First-Year Associate Hires
The data from the Thomson Reuters Institute’s index reveals a significant reduction in the hiring of first-year associates, particularly among Am Law 100 firms. In September, the average number of new first-year associates at these top-tier firms plummeted by nearly 17% compared to the average from the previous two years. The Am Law 200 firms experienced an even steeper drop, with a 25% decrease in first-year class sizes, while midsize firms hired 9% fewer first-year associates during the same period.
Impact on Expenses
The overall reduction in new associate hiring has not entirely offset the growth in headcount observed in midsize and Am Law 200 firms. Consequently, direct expenses across large and midsize U.S.-based law firms surged by more than 6% in the third quarter of 2023. While Am Law 100 firms saw a 1% decline in overall associate headcount compared to the previous year, the numbers grew by 4% and 8% at Am Law 200 and midsize firms, respectively.
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Outlook for 2023
William Josten, Manager for Enterprise Legal Content at the Thomson Reuters Institute, expressed his perspective on the outlook for the legal market in 2023. He anticipates that the year will be decent but not outstanding, with varying performance across different firms. Some are thriving, while others face challenges in the evolving legal landscape.
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Managing Expenses
Overhead expenses also showed a noteworthy increase, rising by 7% in the third quarter, continuing a trend that began at the start of 2023. Notably, Am Law 100 firms managed to control expense growth more effectively compared to other segments of the market.
Practice-Specific Demand
The demand for legal services remained relatively stable in the third quarter, albeit with significant variations depending on the practice area. The demand for bankruptcy lawyers surged by 6% compared to the previous year, and litigation demand increased by 2%. Conversely, demand for corporate work experienced a decline of nearly 2%, while M&A demand dropped by over 5% in the third quarter, according to the index.
In summary, U.S. law firms are taking a cautious approach to first-year associate hiring in 2023 in an effort to improve profitability and mitigate rising expenses. The outlook for the year varies across firms, with some poised for growth and others facing challenges in a dynamic legal market. Additionally, the demand for legal services fluctuates by practice area, reflecting the evolving needs of clients.
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