PMI Slips in Q4 as Productivity Softens and Demand Growth Is Offset by Other Shortcomings

Topics: Billing & Pricing, Data Analytics, Law Firm Profitability, Law Firms, Legal Innovation, Legal Operations, Peer Monitor, Practice Engineering, Reports & White Papers, Surveys, Thomson Reuters

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Through the first three quarters of 2018, the large law firm market enjoyed average growth in demand, rates, and productivity. The fourth quarter, however, was marked by a slowdown in demand growth, coupled with flattening productivity and rising expenses.

As a result, the Thomson Reuters Peer Monitor Economic index (PMI) slid down seven points to 56.

Despite the small skid, the PMI is still among the highest we have seen in the past 2½ years, as the market continues to maintain the positive momentum we have seen it achieve in 2018.

The PMI, produced by Thomson Reuters, 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.

Overall, demand rose 1.2% in the fourth quarter. However, like we’ve seen throughout the past year, much of that growth was isolated among firms in the Am Law 100. Firms in that segment averaged 3.9% growth in Q4, while firms in the Am Law Second Hundred averaged 0.3% growth, and the average Midsize firm contracted by 0.4%.

Productivity slipped 0.1% in Q4, because of slowing demand and a slight uptick in hiring. Even with the fourth-quarter contraction, however, productivity has enjoyed gains in three of the last five quarters, finishing the year up 0.2% — the first year of positive growth since 2010.

You can download the full PMI Q4 Report here.

Mike Abbott, vice president of Enterprise Thought Leadership and Content Strategy for Thomson Reuters said that 2018 was “unquestionably a positive year for the large law firm market” and pointed out that “demand rose broadly across the market, accompanied by strong rate growth.”

However, Abbott said he was unsure if “the tailwinds will continue in 2019” because larger law firms are still facing challenges on several fronts. “Client rate pressure and a shifting competitive landscape for legal services continue to pose challenges,” he explained. “And while the entire market was improved in 2018, we saw an increasingly segmented market where the very largest firms gathered the lion’s share of the gains last year.”