- Law firms raised their rates an average of 5.5% in the first quarter of 2023, the largest quarterly increase since before the global financial crisis of 2008-09, according to a Thomson Reuters report.
- The higher rates and a halt to the overall decline in demand helped lift the Thomson Reuters Law Firm Financial Index up from a record-low score set in the fourth quarter of 2022. The index score had fallen six straight quarters prior to the start of 2023 and remains in historically low territory.
- Counter-cyclical practice areas such as litigation and bankruptcy saw much greater demand than transactional practice areas such as M&A in Q1 2023, a potential red flag for law firm economic stability the rest of the year.
Am Law 100 firms led the way in the area of rate increases, hiking their rates 7.2% in the first quarter of the year compared to the same time period in 2022.
This “worked rate” growth among the largest firms was the highest in the history of the Thomson Reuters Law Firm Financial Index, which has been around since 2007. The previous high was 7.0%, which occurred before the global financial crisis in the late 2000s, according to the recent report.
Worked rates are the amount clients agree to pay to engage work on a matter.
Firms in the Am Law second hundred raised their worked rates an average of 5.2% in the first quarter, and midsize firms increased their rates an average of 4.9%.
The worked rate growth across firms marked the first time that rates have grown faster than the U.S. core inflation rate since Q3 2021, the Thomson Reuters report said.
These rate increases contributed to profits per lawyer rising in the aftermath of five straight quarterly declines.
Meanwhile, demand for law firm services increased 0.1% last quarter compared to the first quarter of 2022, a figure that bucked the trend of three quarters in a row with demand declines.
In the first quarter of 2023, demand across all firms for litigation rose 2.4%, and demand for labor and employment work rose 1.1%.
Meanwhile, M&A saw a 7.7% decline in demand compared to the same time period a year ago and real estate saw a 7.6% decline. Tax demand dipped 3%.
Midsize law firms saw demand for their services increase 1.8%, as they experienced strength in counter-cyclical practices and better relative performance in transactional areas, Thomson Reuters said.
Am Law 100 firms saw demand decline 1.5%, and Am Law second hundred firms saw demand decline 0.2%.
Productivity across firms declined 3.5%, marking the fourth straight quarter in which productivity declined more than 3%.
“While the quarter was generally positive for law firms, the good news was not evenly distributed,” said Paul Fischer, president, Legal Professionals, Thomson Reuters. “Some firms achieved topline growth primarily through higher rates, while others were able to better manage capacity to accommodate more work.”
“Given the current economic uncertainty, firms may continue trying differing strategies to suit their unique blend of practices, clients, and locations,” Fischer said in a press release.