PMI Drops in 4th Quarter as Weakening Rates & Productivity Hamper Growth

Topics: Data Analytics, Efficiency, Law Firm Profitability, Law Firms, Midsize Law Firms Blog Posts, Midsize Law Firms Reports & White Papers, Peer Monitor, Reports & White Papers, Thomson Reuters

workflow

 

The Peer Monitor Economic Index (PMI), which measures the relative health of the legal marketplace, fell two points to 50 in the fourth quarter of 2015 — its second consecutive quarterly decline. Weakening rates and productivity, coupled with flat demand pressured firm profitability for the quarter and led to year-to-year declines in all three categories.

The PMI is produced by Thomson Reuters, 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.

Demand, defined as the growth in billable hours, for large law firm services was flat in the fourth quarter, breaking a string of seven consecutive quarterly gains — the longest winning streak since the recession. For 2015 as a whole, demand was up only 0.3%, compared with 0.7% in 2014.

 

Worked rate growth, defined as the negotiated rates as determined by the matter value (often referred to as agreed rates), was only 2.4% — the lowest rate growth since Q1 2011. Combined with near-record low collected realization rates, the weak rate growth in 2015 was a major restriction on firm revenue growth.

Additionally, productivity declined 1.2% in the fourth quarter. While productivity has been dropping for the last two years, the decline accelerated in 2015, falling 1.1% for the year, compared with 0.6% for 2014. Hours worked per lawyer have reached their lowest level in more than three years.

PMI graphic 4Q

“While the law firm market scored yet another positive year in 2015, momentum is clearly slowing,” said Mike Abbott, vice president, Client Management and Global Thought Leadership for Thomson Reuters. “Demand was flat in the fourth quarter, and rate growth and productivity continue to weaken. With growing concerns about a global economic slowdown, firms need to focus on identifying opportunities to achieve greater growth, operational efficiency and profitability in 2016.”

Areas of Strength

Transactional practices remained strong. Corporate work rose 1.9% in the fourth quarter, and 2.2% for the year. Real estate was up 2.5% in Q4 and 3.6% for 2015. Tax work slipped 0.3% in the quarter and was down 0.1% for the year.

Litigation, meanwhile, fell for the 13th consecutive quarter, dropping 1.9% in the fourth quarter and down 1.0% for the year. However, the declines in litigation seen in 2015 were almost entirely within the Am Law Second 100 sector. Both Am Law 100 and Midsize firms saw flat demand for litigation, a slight improvement from previous years.

Direct expenses jumped 1.8% in the fourth quarter — the slowest growth rate seen over the last two years. Meanwhile, overhead expenses accelerated slightly, rising 2.7%.