Demand Continues to Slow for Large Law, While Strong Rate Growth Acts as Buoy, Q3 PMI Report Shows

Topics: Client Relations, Data Analytics, Efficiency, Law Firm Profitability, Law Firms, Midsize Law Firms Reports & White Papers, Peer Monitor, Thomson Reuters

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EAGAN, Minn. — The large law firm market slowed again in the third quarter, as declining demand more than offset increasing rates, according to the Thomson Reuters Peer Monitor Index (PMI).

The PMI, a metric produced by Thomson Reuters’ Peer Monitor, which measures the relative health of the U.S. large law firm market,fell one point to 49. The PMI is a composite index of law firm market performance using real-time data drawn from major law firms in the United States and other key international markets. A PMI of 65 or greater indicates strong law firm market performance.

Demand for the large law firm market dropped a firm average of 1.9% in the third quarter, but the results found within Peer Monitor’s defined segments were tiered. The Am Law 100 market segment found itself just barely on the positive side of neutral — growing 0.1% in Q3. Meanwhile, the Midsize law firms (those law firms outside the Am Law 200) averaged a decline of 1.6%, and the Am Law Second Hundred firms fell 4.3%. This result further accentuates the enhanced year-to-date performance of the Am Law 100 firms in comparison with the other two segments when it comes to growth in demand.

Peer Monitor

“While much of the large law firm market struggled in the third quarter, we continue to find that certain pockets of the market are thriving,” said Mike Abbott, vice president of Client Management and Global Thought Leadership at Thomson Reuters. “While many of these firms happen to be in the tier of the largest firms, we are also seeing successful strategies being executed across various firm sizes and geographies.”

In line with the overall demand for the large law firm market, nearly all major practice groups had weaker demand in the third quarter. All of the transactional practices pulled back slightly, and litigation fell 3.5%. Through the first nine months of 2017, litigation work was down 2.2% — the weakest performance for the first three quarters of any year since 2013.

Despite the weak quarter for demand, there was a silver lining present in the continued strength of rates. Worked rates grew 3.1% in Q3, tying the best mark since Q2 2014. The strong quarter growth mark helped push year-to-date rate growth to 3.0%. It also preserved a positive average fees-worked growth (0.9%) for the third quarter. That makes 18 consecutive quarters of a positive fees-worked growth for the large law market. Fees-worked is an analogue for accrual-basis revenue, calculated as the product of rates multiplied by demand in hours.

Over the last few years, we’ve seen a consistent trend of demand peaking in the first quarter of the year and subsequently declining steadily as the year progressed. That pattern has persisted into 2017 and we’ll be watching closely to see whether or not the market manages to break the cycle in the fourth quarter.

You can download a copy of the Q3 2017 PMI Report here.