Peer Monitor Economic Index Holds Steady in 3Q, Amid Drop in Demand

Topics: Billing & Pricing, Efficiency, Law Firm Profitability, Law Firms, Peer Monitor, Thomson Reuters

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EAGAN, Minn. — The large law firm market battled crosscurrents to a standstill in the third quarter of this year, as higher rates were offset by slumping demand. When the dust finally settled, the Thomson Reuters Peer Monitor Economic Index (PMI), which measures the relative health of the large law firm market, was unchanged at 48 in the third quarter.

The PMI is produced by Thomson Reuters Peer Monitor, and is a composite index of law firm market performance using real-time data drawn from major law firms in the United States and key international markets. A PMI of 65 or greater indicates strong law firm market performance.

That said, average demand is trending in a negative direction. After the second quarter broke a string of nine consecutive quarterly gains in demand, the third quarter saw not only a continuation of the decline but an acceleration, with the average firm’s demand falling 1.1%. Year-to-date average firm demand has fallen into negative territory, down 0.3%.

But helping to offset that was the fact that rates have been rising steadily all year. In the third quarter, worked rates jumped 3.1%, the highest rate growth in two years, since the third quarter of 2014.

Meanwhile, expenses have been growing every quarter this year. Direct expenses rose 4.3% in the third quarter of this year — the highest rate in more than four years. Indirect expenses were up 4.1% — rising faster than any time since the fourth quarter of 2008.

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“While the large law firm market managed to hold its ground in the third quarter, several key indicators are trending in a negative direction,” said Mike Abbott, vice president, Client Management and Global Thought Leadership at Thomson Reuters. “Demand has been gradually declining as the year wears on. Meanwhile, expenses are climbing at a pace not seen for several years.”

Productivity was down sharply, falling 2.5%. While lawyer headcount growth pulled back slightly, new lawyer hiring is still running ahead of last year’s levels.

Taken together, the current legal market found itself largely treading water and struggling to maintain current profitability.

Individual transactional practices were mixed-to-weak. Corporate work rose 0.5%, but real estate fell 1.7% and tax work dropped 2%. Litigation was down 1.9% — its weakest performance this year. Patent litigation fell 2.6%. Patent prosecution has been on the few consistent bright spots this year and was up another 1.3% in the third quarter. Labor and employment was down 1.6% and bankruptcy dropped 1.9%.

“While stronger rate growth is helping to offset these drags on profitability, firms may be running out of runway for much more rate growth, leaving them to cope with slower demand and higher costs,” Abbott added.