The large law firm market has gained some steam after an underwhelming start to the year. The Thomson Reuters Peer Monitor Economic Index (PMI) rose three points to 53 on the back of strong rate growth and a slight bounce in demand compared to Q1. The PMI, produced by Thomson Reuters Peer Monitor, is a composite index of law firm market performance using real-time data to measure the relative health and stability of the large law market in the U.S.
A New “Middle of the Market”?
As we referenced in 2019 Q2 PMI report, the large law firm market has had somewhat favorable conditions so far this year; and historically, the Am Law 100 has fared the best. Currently, the Am law 100 leads the market in major PMI factors such as demand growth, rate growth, and productivity. Not only that, but it also leads the market in fees worked and lawyer growth as well. It may simply appear that there is truth to the adage “the rich get richer,” but as we look deeper we identify some interesting developments inside this segment.
For example, 2019 has been a year of emergence of the latter half of the Am Law 100, or the Am Law 51-100. This “middle” market is not only keeping pace with the Am Law 1-50 but has outperformed it in terms of demand and productivity over the last three quarters. In the second quarter, the Am Law 1-50 had an increase in demand of 0.9%, while the Am Law 51-100 more than doubled this figure with an increase of 2.2%. This has translated into improved productivity, where the Am Law 1-50 has seen a contraction of 2.3% this quarter, dramatically worse than the Am Law 51-100 who actually increased their productivity by 0.1%. Indeed, it was the only segment this quarter to have any growth in productivity.
One of the more surprising discoveries when comparing the two segments is the difference in direct expense growth. The Am Law 1-50 is experiencing large growth in compensation of lawyers at 9.6% in Q2. Contrast that with the Am Law 51-100, who has experienced 7.0% direct expense growth. One would assume that to compete with the top tier, the Am Law 51-100 would have to outspend in order to lure talent, but it appears that this is not the case.
Further, the productivity decline and significant direct expense growth are dampening factors in the Q2 PMI figures for the top 50, says Peer Monitor Analyst Joe Blackwood. “With lawyer growth taking off against subpar overall demand growth, productivity has suffered a significant setback,” Blackwood explains. “Prior to our productivity resurgence in 2018, we had seen three years of contracting productivity. Now that 2019 is showing the same signs, it is beginning to seem that 2018 was the exception to the rule and productivity will continue to contract long-term.”
Blackwood notes that the same can be said about direct expenses. “With demand up less than a percentage point, firms are looking toward lateral hires to drum up business,” he adds. “To incentivize lateral movement, often you must offer higher compensation, which continues to drive up direct expenses.”
You can download a copy of the Q2 2019 PMI report here.