Knowing where growth is happening in the market is a key element for a law firm’s strategic planning. Aggressive headcount growth by a firm during a time of market contraction may not necessarily be a bad thing, but it depends on whether the firm is strategically positioning itself for potential practice area growth, or simply growing for the sake of growth.
According to the Peer Monitor Index (PMI) report for the first quarter of 2016, recently released by Thomson Reuters Peer Monitor, the market is finally showing signs that it may be starting to reward those firms that have tried to grow strategically now that additional work is finding its way into the large and midsize law firm segment.
The overall index, which measure key metrics like demand, productivity, rates and expenses, ticked up two points in the first quarter of 2016, the first time the index has shown signs of positivity in six consecutive quarters.
This increase in the index score was driven in part by stronger rate performance on the part of law firms, but also by increasing demand for law firm hours on the part of clients. Overall, demand for hours increased 1.2% compared to the same time a year ago. In contrast, the first quarter of 2015 saw demand growth of only 0.6%. While 1.2% growth is not outstanding, it is the strongest demand growth in the first quarter of the last three years.
…The most successful law firms are the ones who know how to position themselves for where the growth will be, even in a down market.
What is perhaps most notable is that only one segment, the AmLaw Second 100, saw demand contract on the quarter. This is another positive indicator that growth is moving back into the market, and that may pay off for those firms who have been focused on positioning themselves to capitalize on newfound opportunity.
But as with most things impacting law firms, not all practice areas are created equal. Transactional practices continued to be strong performers. Corporate work increased by 0.8%, while real estate work grew by 1.5%. The only key transactional area to decrease was tax work.
The other dominating practice area for most law firms is, of course, litigation. As has been the case for quite awhile now, litigation saw declining year-over-year demand in the first quarter this year. But in this case, the fact that the news is less bad may actually make it good news. The decline experienced by litigation in the first quarter was the smallest decline seen in the last three quarters.
Moreover, the decline in litigation was attributable entirely to the AmLaw Second 100. Both the AmLaw 100 and Midsize firms saw their litigation demand grow in the first quarter, 0.9% and 1.7% respectively. While negative growth across the market is never a good thing, with indications like this, however, it may be a sign that the situation is less dire than in previous quarters. And coupled with the fact that most of the market actually saw growth in this key area, it could certainly be seen as a cause for optimism.
It is often said of the stock market that the best traders are the ones who know how to make money even with the market is losing. For law firms, a parallel axiom may be that the most successful law firms are the ones who know how to position themselves for where the growth will be, even in a down market.