Dive Brief:

• Law firms raised their rates an average of 4.8% through the first 11 months of 2022, according to a legal industry report.
• Am Law 100 firms raised their rates 6.3% on average last year, which was followed by Am Law 200 firms at 4.8% and midsize firms at 3.8%.
• The continued uptick in fees charged to clients came during a period in which demand for legal services rose only 0.1%, down from the 3.7% growth rate recorded for all of 2021, said the report from the Thomson Reuters Institute and the Georgetown University Law Center on Ethics and the Legal Profession.

Dive Insight:

The legal market report highlighted that the law firm rate increases last year were fairly aggressive and that firms continued to collect the rates they billed.

But the report highlighted that the rate bumps through November 2022 were slightly less than the 5% average rate of inflation.

“While that divergence might be tolerated for a while, over the long term it is not sustainable,” the report said. “Depending on how long it takes to bring inflationary pressures under control, law firms could increasingly experience an economic squeeze.”

For 2023, the report said, law firms appear to be counting on rate increases to maintain profitability.

Along those lines, law firm leaders previously told the Wells Fargo Legal Specialty Group they plan to rate rates this year an average of 7% to 8% before discounting. 

However, the Thomson Reuters and Georgetown Law report said there are signs clients may be more resistant to further rate hikes as evidenced by a slowdown in client payments late last year. 

“If firms are unable to fall back on rate increases as their traditional response to economic challenges, they may face increasingly difficult decisions in 2023 and 2024,” the report said. “Again, this will likely depend on the length and depth of any coming recession.”

The report said law firm leaders “are quite guarded as to their predictions for 2023” given the overall economic uncertainty. 

Demand slowdown

Meanwhile, the slowdown in demand for legal services was sparked by what the report called a “sharp contraction in transactional work that resulted from growing economic uncertainty.”

Practice areas experiencing significant declines in demand included mergers and acquisitions and high-end corporate finance and deal work.

This type of work is most typically handled by larger firms, so the demand decreases hit them the hardest, the report said. 

Midsize firms performed better than many larger firms, including in the areas of litigation, labor and employment, and intellectual property. These midsize firms were the only ones to show positive demand growth in non-transaction areas during the second half of 2022.

Overall, lower-cost firms outpaced higher-cost firms in demand growth, according to the report featuring data from 170 U.S.-based law firms. 

“Predictably, as demand fell and corporate law departments came under tighter financial pressure, lower-cost providers began outperforming higher-cost competition,” the report said.