While the large law market in 2019 isn’t an exact reflection of 2018 so far, there are some similarities — including improved demand and rates — but also a few key differences.
This year’s third quarter saw one of the strongest quarters for demand growth since the end of the Great Recession nearly a decade ago — up 2.4%. Continued rate growth also contributed to strong topline growth. However, the revenue increases were tempered by a rise in expenses and decline in productivity.
The net result was a three-point gain in the Thomson Reuters Peer Monitor Economic Index (PMI) to 56, the second consecutive quarterly rise.
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.
You can download a copy of the Q3 2019 PMI report here.
Demand and Rates Continue to Impress
Like stated early, demand for law firm services rose in Q3 by 2.4%. This follows a slight contraction in Q1 and modest growth in Q2, and as a result, year-to-date demand is now up 1.0%. This has surpassed the 0.9% gain seen through the first nine months of last year.
Average worked rate growth has been very consistent this year, rising 3.7% in the third quarter, after 3.8% gains in both the first and second quarters, resulting in an unsurprising gain of 3.8% year-to-date.
While all law firm segments are seeing higher rate growth this year, much of the growth is occurring in Am Law 51-100 and Second Hundred. Rate growth at Am Law 51-100 is up 4.2% year-to-date, compared with 3.4% through the first nine months of last year. Similarly, Am Law Second Hundred is seeing rate growth of 3.8% this year versus 2.9% at this point last year. But while rate growth for these two segments is nearly a full percentage point higher this year (up eight- and nine-tenths of a percentage point, respectively), Am Law 100 and Midsize law firms are a mere one-tenth of a percentage point higher this year at 5.2% and 3.0%, respectively.
Overhead Expenses Creeping Up & Up
Expenses continue to rise higher, dampening the great demand and rate developments. Overhead expense growth rose from 3.4% in Q2 to 4.1% in Q3 — the highest level in more than three years. And direct expense growth pulled back marginally from last quarter to 4.2%, however that is still one of the highest levels seen since 2012.
Technology and Recruiting costs continue to be some of the main drivers to this overhead surge. Technology expenditures have grown by 6.9% over the past 12 months, while recruiting cost gains sits at a whopping 28.5%.
“The large law firm market is seeing a second straight year of strong growth in both demand and rates,” said Mike Abbott, vice president of Enterprise Thought Leadership and Content Strategy at Thomson Reuters. “The growth is fairly widespread across market segments, practice areas, and geographies. As macroeconomic uncertainties continue, it’s important that firms remain vigilant about containing costs and hiring levels.”