MINNEAPOLIS-ST. PAUL — The large law firm market continued its slide after a recent highwater mark in last year’s third quarter, floundering in the first quarter of this year. The Thomson Reuters Peer Monitor Economic Index (PMI) fell by six points to 50 in Q1 2019, despite some of the strongest rate growth seen in years.
In this year’s first quarter, however, the combination of flat demand growth and falling productivity proved too much to overcome. Indeed, over the past two consecutive quarters, the PMI has fallen 20%.
The PMI, produced by Thomson Reuters Peer Monitor, 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.
“After a fairly robust 2018, it’s not entirely surprising that the large law firm market has a more mixed first quarter,” said Mike Abbott, vice president of Enterprise Thought Leadership and Content Strategy at Thomson Reuters. While the overall market had somewhat soft demand, Abbott noted, the market segments comprised of larger firms saw relatively stronger demand.
You can download a copy of the Q1 2019 PMI report here.
Demand Starts the Year Flat
The Q1 PMI report showed that demand for large law firm services was down, but only barely, sliding 0.1%. Further, this lackluster overall demand was largely a result of weakness in the midsize law firm sector, which fell a full 1.0%. At Am Law 100 firms, demand was up an average of 1.2%; and up 0.2% for Am Law Second Hundred. (In addition, Q1 2019 had one less working day than Q1 2018.)
Interestingly, last year’s demand also started out much weaker, down 0.5% in the first quarter of 2018; however, that was followed by three consecutive quarters of strong growth. Overall in 2018, demand finished up 1%.
Diving deeper into the numbers for the Q1 2019 report, litigation work — a source of growth for much of 2018 — was flat in the first quarter; and IP practices, also a hot area, were also down in Q1. Transactional practices were mixed — corporate work gained 0.2%, but real estate was down 0.8%, and tax work fell 2.1%.
Rate Growth Improved
The good news in the Q1 PMI report centered on rate growth, which saw its highest quarterly figure in more than six years. Worked or negotiated rates rose a strong 3.8%; and except for the very largest law firms in the Am Law Top 50, which saw rates surge last year, rate growth in the first quarter was generally strong across the board.
At the same time, however, collected realization fell to a historic low, suggesting many law firms may be experiencing difficulty collecting against those higher rates.
Productivity also fell 1.8% in Q1 2019 as firms accelerated headcount growth. In a reversal of the trend of the last few years, headcount surged across the board. Previous to Q1 and going back several years, law firms had managed to slow headcount growth to the point they even saw a headcount contraction in some markets during recent quarters. In Q1, demand did not keep pace, resulting in a drastic imbalance of supply and demand, which pulled down productivity.
Despite the pullback overall, many legal market observers are saying the year is still young and law firms have it in their power to reverse these declines. “There is still plenty of runway left for 2019,” assured Abbott. “And the true test will be whether firms can stimulate demand, maintain price integrity, and balance capacity against demand to put themselves on a better track for the remainder of the year.”