Law firms raised their rates an average of 5.9% in the second quarter compared to the same period a year ago, which helped improve their profitability, according to a Thomson Reuters Institute report.
The growth in so-called “worked rates” outpaced even the 5.5% increase in that category law firms secured in the first quarter of the year, which saw what was then the largest quarterly increase since before the global financial crisis of 2008-09.
Meanwhile, demand for law firm services in Q2 was up 1.5% year-over-year, which was also a bump up from near-flat demand in Q1 2023, the Thomson Reuters Law Firm Financial Index found.
Major drivers of the increased demand were countercyclical practice areas such as bankruptcy and labor and employment. For example, bankruptcy demand was up 5.7% in Q2 compared to the same time a year ago.
Litigation demand also increased 4% year-over-year, which was the second-highest quarterly bump since 2010. Corporate work saw a 0.1% increase in demand.
The growth in countercyclical and litigation work helped offset the continued decline of some transactional practice areas, such as real estate and mergers and acquisitions. M&A demand was down 6% year-over-year.
Overall, the Law Firm Financial Index score of 50 for Q2 was up six points since Q1 and the highest score in more than a year.
“The law firm market built upon this year’s promising first-quarter results with even stronger demand and rate growth in the second quarter,” said Paul Fischer, president, Legal Professionals, Thomson Reuters, in a press release. “If current trends continue, the market could be headed for a positive full-year 2023.”
The different law firm segments have taken varied approaches to increasing profitability, the Thomson Reuters Institute report said.
The Am Law 100 firms have cut back their attorney ranks, with a 2.5% decline in associate full-time equivalents since the beginning of the year. These large firms are attempting to reduce expenses and boost efficiency.
Meanwhile, midsize law firms have grown their associate headcount 0.6% as they try to gain market share.
“The report concludes that both strategies proved effective for improving profitability in the second quarter,” the Thomson Reuters press release said.
Meanwhile, the Am Law second hundred firms are trying to find a “Goldilocks zone” between the approaches of the largest firms and the midsize ones, the report said. The Am Law second hundred increased their associate headcount by 0.4%.
Despite their improved performance overall in Q2 2023, Fischer said, firms “need to be mindful of headcount, expenses, and shifting growth among practice areas to achieve sustainable profitability.”