Prior to the bulwark of broader economic shutdowns, stay at home orders, and court closures, the large law firm market saw strong growth in both demand and rates in the first quarter of 2020. Due largely to these, the Thomson Reuters Peer Monitor Economic Index (PMI) rose four points to 57 in the first quarter.
While worked rates have reached all-time highs many times so far in 2020, another metric, productivity, has continued to contract. In fact, contractions to timekeeper productivity are not new developments as this trend has compounded for the more than a year.
Now that we are more than a month removed from the end of the first quarter, it may come as no surprise that productivity and worked rate growth have continued to diverge. A new development, however, is that they both now share commonality, and one driving force is largely responsible for the effects felt in both categories.
Worked rates ended the first quarter with average growth of 4.1% across all segments. This represented an all-time-high for quarterly growth in this metric. Indeed, it would have been hard to predict that this number would be surpassed, and to the extent that it was, just one month later.
In April, worked rates increased by an average of 5.1% across the market. This charge was again led by those law firms at the top of the market, with the larger increase of 6.1% averaging among firms in the Am Law 100. While one may assume at first glance that firms further increased their rates in an attempt to make up for potential lost revenue due to the COVID-19 pandemic, upon closer inspection of the productivity figures it becomes clear there is a different driving force at play.
Productivity declined by 0.8% on average across all fee earners in the first quarter. As we entered April, this decline only was further exacerbated, with the average lawyer working 119 billable hours in the month, down six hours from Q2 2019. To put this into context, this decrease in hours coupled with the average worked rate of $534 in 2020 cost the average firm $3,204 per lawyer in the month of April alone.
However, the decline in April was not equally felt across all lawyer titles. For example, while the average associate worked 5.7 less billable hours in April than they did per month in Q1, the decline among equity partners was only half an hour on average. This was a result of increased levels of advisory work coming from clients that needed help navigating these unprecedented times. Further, billing pressures have resulted in many partners holding on to more work and funneling less down to their associate ranks.
As a result, upon closer inspection, the significant growth in average worked rates in April appears to have been directly driven not as much by across the board rate hikes as much as by the decrease in associate hours worked. Put another way, a higher proportion of work in the month of April that was completed by higher-fee-commanding equity partners relative to associates, which caused the average worked rate charged in the market across all lawyer titles to increase significantly.
You can download a copy of the Thomson Reuters Peer Monitor Economic Index (PMI) report for the first quarter of 2020 here.