Dive Brief:

• A strong drop in demand for legal services amid ongoing economic uncertainty plunged the Thomson Reuters Law Firm Financial Index to an all-time low score at the close of 2022.
• Legal demand contracted 3.9% in the fourth quarter of 2022 compared to the same period a year earlier, with transactional practice areas such as M&A and real estate seeing a sharp decline, the Thomson Reuters Q4 report found.
• The slowing in demand combined with strong seasonal hiring by law firms resulted in attorney productivity dropping 7.2%, a decline the report said was “equal to the depths of the pandemic lockdown.”

Dive Insight:

The fourth quarter of 2022 was the sixth straight quarter in which the Law Firm Financial Index score declined, an outcome the Thomson Reuters report called “the logical outcome of factors which had been building for most of the year.” 

These factors included rising interest rates, as well as geopolitical and economic instability.

As a result, demand for legal services has dropped off, particularly when compared to a final quarter of 2021 that was one of the busiest on record for firms.

Some of the practice areas that saw the steepest demand declines in late 2022 were mergers and acquisitions (16.6%), real estate (11.5%) and tax (10.3%).

These transactional practice areas are some of the same ones that drove record profitability in parts of 2021 and were strong relative to pre-pandemic levels at the start of 2022. 

General corporate work also saw a 6.4% decline in demand in the last quarter of the year.

“Law firms are at a bit of a crossroads as they face weaker demand and inflationary pressures,” said Paul Fischer, Thomson Reuters’ president, Legal Professionals.

Meanwhile, profits per lawyer fell 4.5% in Q4 compared to Q3 when measured on a rolling 12-month basis. Rate growth moderating to 4.4% contributed to the slide in profits, according to the report. 

The report also said profits declined in 2022 for the first time on an annual basis since the Global Financial Crisis more than a decade ago.  

As for expenses, direct expense growth on a per-lawyer basis slowed from 10.2% in Q1 2022 to 5.7% in Q4. The report said this expense growth was “increasingly due to the higher level of on-boarding new talent, rather than salary increases.”

Overhead expenses per lawyer also saw the pace of increase slow down, with 5.8% growth in Q4. However, the report said firms’ return-to-office plans could impact these figures moving forward.

“Current economic challenges are making it imperative for law firms to improve their operational efficiencies,” Fischer said in a press release. “Law firms should look at either maintaining or expanding their investments in technology, putting themselves in stronger competitive positions to support clients and win new business as they navigate the uncertain year ahead.”