Q1 PMI Perspective: As Goes the First Quarter…

Topics: Billing & Pricing, Business Development & Marketing Blog Posts, Data Analytics, Law Firm Profitability, Law Firms, Midsize Law Firms Blog Posts, Peer Monitor

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As noted previously, the Thomson Reuters Peer Monitor Index (PMI) score for the first quarter of this year dropped eight points to 52. However, one could argue that the drop could be more of a reflection of the strength of law firms in the fourth quarter in 2017, than a lack thereof in the first three months of this year.

(The PMI, which measures the relative health of the U.S. large law firm market, 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.)

Consider this: The PMI of the first quarter in each of the last three years was 54, 52, 53, respectively. Thus, the 30,000-foot view of the Q1 2018 PMI of 52 is very much in line with what we’ve seen in the industry over the last few years. There are, however, underlying differences in this quarter when compared against the previous Q1s I’ve mentioned, and those differences help illuminate the high variability of performance by law firms.

Demand is in the Details

Let’s start by looking at the Peer Monitor universe as a whole. While the last few first quarters have had average positive demand growth between 0.3% and 1.2%, this quarter saw the average law firm experience a slight contraction of 0.5%. However, productivity weakening remains at the same pace of recent Q1s and has not decelerated more. This suggests that law firms are slowing their rate of lawyer growth — which they indeed are.

The reality of the Q1 demand decline — while the average experience for all segments — is certainly not homogenous across all firms nor even all segments. Am Law 100 firms had a positive average demand growth, while the Am Law Second Hundred and Midsize segments saw demand contract for the average firm. Further highlighting this variability is the greater dispersion of Q1 demand growth for the Am Law Second Hundred and Midsize segments than in the Am Law 100.


Forms of volatility are also present for firms in all areas of the market as it pertains to demand in the first quarter. The higher volatility resides among the Am Law Second Hundred and Midsize firms, but still exists within some of the largest firms. Only 44% of Am Law 100 firms had a reversal in Q1 demand growth from 2017 to 2018. That proportion increased to 55% when measuring Am Law Second Hundred firms and was 52% for Midsize firms.

Reveling in Rate Growth

The average rate growth in Q1 was 3.3% But again, that only tells part of the story. As we look at the segments, we can see that the Am Law 100 saw their worked rates grow 4.5%. Meanwhile, the Am Law Second Hundred and Midsize both fell short of 3% increases in Q1 (2.7% and 2.8%, respectively).

It’s clear that Am Law 100 firms pushed their worked rates more aggressively to start the year than in the past few years, and with the other two segments holding their general pace from last year, the overall rate growth increase grew at a faster pace this quarter than in the first quarter of recent years. Thus, rates have continued being the engine behind top line fees growth in Q1.

As to cost, the overall average expense growths for both direct (timekeeper) and overhead expenses were consciously managed over the last 12 months, where through Q1, the rolling 12-month growths of both categories were below 3%. Direct expense growth grew 2.7% and overhead growth grew 2.2%.

This is only the second time in the last nine quarters that both levels have fallen below the 3% threshold. Relative to each other, the Second Hundred and Midsize segments are restraining expenditure growth more than the Am Law 100 over the last 12 months.

All about the First Quarter

Naturally, the beginning of a new year is a time to focus on the build-up of work-in-progress (WIP) — a time where new rates are set, and corporate counsels are operating on new budgets, (before the first measures of the year start affecting their course).

The largest law firms continue to show more general stability in WIP, a top-line growth indicator, than other segments have shown. Rates grew at their highest quarterly increase in more than five years for those largest firms. And large firms also continue to hold and even slightly increase demand levels, which has provided a first quarter growth in line with the last few years.

Those firms outside of the Am Law 100 are experiencing less consistent Q1 growth across their respective segments. While pockets of success are found in those segments, the inconsistency of demand growth and stagnant rate growth from 2017 makes for the ingredients of a multifaceted story as 2018 unfolds.