Dive Brief:
- Law firms raised their rates 6.5% in the fourth quarter of 2023 compared to the same period a year prior, helping them return to profitability, according to an industry report.
- Demand for law firm services rose 1.7% in Q4, an uptick driven by growth in counter-cyclical practice areas such as labor and employment, bankruptcy and litigation.
- Law firms were able to slow down their growth in expenses by “keeping salary growth and year-end bonuses in check while reducing incoming fall associate classes,” according to the latest Thomson Reuters Law Firm Financial Index report.
Dive Insight:
The 6.5% increase in so-called “worked rates” charged by law firms in the fourth quarter of 2023 was the highest quarterly increase since the Global Financial Crisis of 2008-2009, and the fourth straight quarter that a new post-crisis record was set.
Worked rates are the amount clients agree to pay to engage work on a matter, and the increase in law firm rates has sparked in-house legal teams to place a greater emphasis on outside counsel management.
The rise in firms’ worked rates in Q4 was a full percentage point higher than the 5.5% increase in Q1 of 2023, according to Thomson Reuters, which noted that rate growth accelerated throughout the year.
“The net result: the law firm market returned to profitability in 2023 after seeing profits contract in 2022,” a press release about the report said. “However, profits were not as strong as in 2020 and 2021, when profits-per-equity partner soared by double-digit percentages.”
Large law firms also benefited from strong counter-cyclical demand through the fourth quarter, an ongoing trend.
Bankruptcy law saw a 6.4% increase in demand year-over-year in Q4 and litigation experienced a demand bump of 3% year-over-year in the fourth quarter.
“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,” the Thomson Reuters press release said.
Additionally, law firms’ direct expenses saw their slowest growth in more than two years.
Direct expenses rose 5.3% year-over-year in Q4, and overhead expenses rose 6.6% year-over-year during that time period.
“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.”
