Despite daunting challenges, midsize law firms flexed their creativity and agility to prove themselves surprisingly resilient in 2020, according to the new 2021 Report on the State of the Midsize Legal Market, from the Thomson Reuters Institute. Though still trailing behind Am Law firms, midsize law firms matched their best profit performance in a decade and saw 2020 end with an upswing in demand.
Even though demand for midsize law firm services was down compared with the previous year, the trend at the close of 2020 swung upwards, particularly in key corporate practices, a trend that has carried over into early 2021. Midsize law firm demand was also buoyed by strong performance in bankruptcy, a trend also likely to continue for awhile as the long-term economic effects of the pandemic are still being felt.
You can download the 2021 Report on the State of the Midsize Legal Market here.
Leaders at midsize law firms should also be encouraged by strong rate performance in 2020. Larger firms increased rates at a record pace, while midsize firms were more restrained with their rate increases in 2020. Worked rates at the midsize law firms went up by an average of 3.9%, compared with 6.1% for Am Law 100 firms. As client price sensitivity increases, this more modest pace of rate growth could help strengthen midsize firms’ positioning with clients because of a more favorable cost-value proposition. And that could be crucial since increasing price pressure on law firms is likely as clients begin to plan for their own budget pressures after what was, for many, a very difficult year.
Rate growth in 2020, along with reductions in costs such as office and marketing expenses, helped offset weakness in demand, helping to guide midsize firms to solid profitability growth, with average profits-per-equity partner growing by 5.8% — nearly double the pace of the previous year and matching the high-water mark for the decade. However, questions remain about the sustainability of this type of strategy as a basis for future profitability.
The report also sheds light on other potential paths to growth for the midsize sector, noting that midsize firms are more likely to be recognized by clients for their value and pricing than are larger firms. While larger firms often carry greater brand cache, which can translate into credibility in corporate boardrooms; findings from the report, however, show that such recognition does not always result in a commensurate advantage in securing new work from clients.
Midsize law firms that can take some of the success found in 2020 and reinvest into building greater brand cache, improving their technology platforms, and marketing their cost advantages could be well positioned to capture a growing share of an already competitive legal market that is already demonstrating that competition will only increase in intensity.