Large Law Firms Improve Demand & Rates but Still Struggle with Realization, Q1 PMI Shows

Topics: Client Relations, Data Analytics, Law Firm Profitability, Law Firms, Peer Monitor, Thomson Reuters

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EAGAN, Minn. — The first quarter was generally positive for large law firms, as demand and rates rose, according to the Thomson Reuters Peer Monitor Economic Index (PMI), which measures the relative health of the large law firm market. The PMI rose 5 points to 53, its highest mark since the second quarter of 2015.

The PMI, compiled 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.

In Q1, demand rose 0.3%, but the gain was entirely accounted for by the segment of law firms in the Am Law 100, where demand rose 2.1%. Meanwhile, demand declined 0.4% for the Am Law Second-100 market segment, and declined 0.7% for the Midsize segment.

Peer Monitor Index

Worked rates rose 3.0% in Q1, representing one of the strongest quarterly rate growth figures in more than two years. Firms had been struggling with rate growth for several years; however, since bottoming at 2.4% in the fourth quarter of 2015, rate growth has slowly but steadily improved, moving higher in four of the past five quarters. The Q1 rise is the second-highest mark since Q3 2014, showing a remarkably swift rebound.

However, much of that improvement is being masked by weak collected realization, and overall pricing power remains weak. While rate growth has been accelerating, collected realization on worked rates had its biggest six-month slide in four years. Over the past two quarters, collected realization has dropped 1.2 percentage points, and now stands at 88.6%. So firms, on average, are collecting less than 89 cents on every dollar of work at the negotiated or agreed-upon rates. While firms have been able to push through higher rates, at the same time, they are collecting less when the client invoices come due.

Among practice areas, corporate work was up in Q1, boosted by strength in M&A work; and IP practices were also stronger. Litigation work, meanwhile, was down in the Q1, as were labor and employment, and bankruptcy.

“The first quarter was largely positive for U.S.-based large law firms, as demand and rates rose,” said Mike Abbott, vice president of Client Management and Global Thought Leadership at Thomson Reuters. “At the same time, the recent strength in rates is tempered by weak realization. Even though firms are pushing through higher negotiated rates, they are having difficulty passing on those rate increases when clients receive their invoices.”

You can download a full copy of the PMI report for Q1 here.