“Volatility in the up direction is not a problem — it’s only downward volatility that offers discourse.” — Coreen T. Sol
Coreen T. Sol is a Chartered Financial Analyst who authored the book Practically Investing: Smart Investing Techniques Your Neighbour Doesn’t Know, and while the topic of market investing doesn’t seem to apply directly to the legal market, I think the overarching thought on volatility expressed above certainly does.
Volatility remains the hallmark trait of the legal services market for law firms as we examine the fourth quarter results laid out in the Q4 Peer Monitor Index earlier this month. Even though the fickleness of the legal market trended positive in Q4, a rarity since the Great Recession, that doesn’t mean the market has lessened its volatility. It just lacks the discourse of the opposite result.
Over the last three years, there have been six quarters that have had positive year-over-year demand growth for the average law firm in Peer Monitor, and five quarters with demand contraction. The remaining quarter was a flat performance (0.0%) in Q4 2015 that fell outside of either directional classification. This past fourth quarter would firmly fall in the positive category with demand growth of 1.0%, the highest since Q1 2016.
And while volatility still blankets the market in many regards when benchmarking over a time series, there finally was some positive uniformity across inter-quarter key performance indicators in its result. Beyond the increase in demand, the growth in worked rates persisted; averaging 3.4% growth in the quarter. Meanwhile productivity inched out a positive quarter, reflecting 0.1% growth for the average firm. Expense management was widely executed in a taut way, particularly overhead costs in segments — Am Law Second Hundred and Midsize Law Firms specifically — that didn’t enjoy as much front-end production as others, such as the Am Law 100.
Even if you consider that all the success across the market constituted a large uptick in the PMI to 60 in Q4 2017 due to the improved performance across those metrics, the future market performance is still quite an unknown. Why? Yes, because of the aforementioned volatility.
Accompanying the positive light of Q4, there were also a number of results that occurred that make a further case for the unpredictability of the near future performance of the market. One of those was firms’ litigation practice, which experienced a positive average quarterly growth for the first time since Q1 2012. Litigation work has been a focal area to the continued disaggregation of certain work processes in law firms to address cost efficiency concerns of corporate legal departments. However, even in the current environment of progressive legal operations within those same corporate legal departments and prevailing cost concerns, litigation found its first positive growth in the past 22 consecutive quarters.
So, while the fourth quarter of 2017 provided some well-deserved relief and good news to law firms, what it means for the first quarter of 2018, let alone the entirety of the year, is yet to be understood. One thing that is almost assured, however — more volatility.