Inside the PMI Report: Is Overcapacity Behind Law Firms’ Productivity Drop in Q2?

Topics: Efficiency, Law Firm Profitability, Law Firms, Midsize Law Firms Blog Posts, Peer Monitor, Talent Development, Thomson Reuters

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While not necessarily garnering the same level of attention as marquee metrics like rates and demand, productivity numbers should be offered the same level of consideration, and thus, the sharp drop in productivity experienced by law firms in Q2 should not be overlooked.

As reported in the recently released Peer Monitor Index, the pace of decline in productivity suddenly accelerated in the second quarter, falling 2.8%, the largest drop in productivity since Q1 2013.

So what is precipitating this drop? Simply stated, overcapacity.

For the past several years, law firms have continued to expand headcount in the hopes of building capacity for new work when demand improves. Most firms have been laboring under the theory that they would rather see a short-term slow, steady decline in productivity for the sake of hiring the best talent to be better positioned for the future. But now the slow and steady decline firms have hoped for is showing signs of quickly accelerating.

Productivity decline is a predictable consequence of flat-to-declining demand, coupled with headcount growth that has exceeded 1.3% every month in 2016. Headcount growth in June alone represented the highest figure for the year at 1.9%. And where productivity reached its lowest point since Q1 2013, quarterly headcount was at its highest since Q3 2013.

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When expressed in terms of hours worked, the average lawyer worked three fewer hours in Q2 this year compared to the same period just a year ago. For equity partners, that number was slightly higher at nearly four fewer hours. In terms of fees worked, this loss in hours represents a fairly sizeable decline.


You can download a copy of the 2Q Peer Monitor PMI report here!


To further complicate matters, law firms do not appear to be putting their loftily stated headcount management strategies into practice. Many law firms talk of their efforts to de-equitize some portion of the equity partner ranks and to limit the number of non-equity partners.

But figures from this most recent quarter show that equity partners are being replenished at a rate of 0.87, meaning that very few equity partner full-time equivalents (FTEs) are actually being shed.

At the same time, non-equity partners are being replenished at a rate of 1.09. In essence, for every 10 income partners that leave, between 10 and 11 are being added back. This partner rank that so many firms solemnly talk of dissolving is actually being sustained if not grown slightly.

Given the numerous market forces at play this year, it is safe to assume that U.S. law firms will continue to experience a highly volatile market for the remainder of this year. Continued hiring practices that promote growth in headcount and capacity beyond what demand will support could portend ominous indications for profits as we begin to look at the end of the year.