While the U.S. economy is showing signs of recovery, or at least a “soft landing,” the outlook for the legal market remains mixed in 2023. That is according to the “2023 Report on the State of Legal Market” from the Center on Ethics and the Legal Profession at Georgetown University Law Center and the Thomson Reuters Institute (TRI). However, the report, which is based on financial data for 170 large and mid-size U.S. law firms, did find some bright spots, especially for mid-size firms.
Cause for Alarm
After a virtual boom year in 2021, growing political and economic uncertainty in 2022 contributed to a decline in demand, particularly for transactional work. Yet, law firms continued to add new attorneys at a steady pace, triggering productivity to plummet to a more than 20-year low. At the same time, direct and overhead expenses remained high. The result was smaller profits-per-equity-partner, with PPEP dropping 4.2% over twelve months, ending in late November.
According to the report, the financial reversal, uncertainty about the economic downturn, complications related to the post-pandemic return to the office, retention issues and ongoing market segmentation all the set the stage for a challenging year for law firms in 2023. Sure enough, we have already seen several large firms announcing layoffs and even pushing back start dates for new associates this year.
Related Read: While Challenges Still Remain, the Legal Industry Is Resilient
Cause for Optimism for Mid-Size Firms
The report highlights the apparent mobility of demand for legal services in 2022 — and the benefit of that for mid-size firms. Although the Am Law 200 firms included in the report saw significant deterioration in all practice areas, mid-size firms appeared more competitive in litigation, labor and employment, and intellectual property, having achieved notable growth in these areas. In fact, mid-size firms constituted the only market segment that showed positive demand growth in the second half of 2022.
The trend has continued into 2023. TRI reports that mid-size law firms have seen their demand grow by 1.8%, with demand for Am Law 100 firms shrinking by 1.5%.
The 2023 legal market report says the numbers point toward a shift that has been underway for some time — the re-segmentation of the market, with more price-sensitive practices moving to smaller firms that can deliver quality services at lower rates. Litigation, for example, has become more price-sensitive because of e-discovery and other factors, leading to a reduction in the amount of litigation being performed by the largest and priciest firms.
This bodes well for mid-size firms. According to TRI’s Law Firm Financial Index, demand for litigation has grown 4% year-over-year in the second quarter of 2023. Meanwhile, transactional work shows few signs of bouncing back in the near future. Mergers and acquisitions demand slid 6%, and real estate demand dropped 8.4%.
The 2023 report also looked into clients’ opinions of specialized law firms—which outpaced all other firms in most key performance metrics in 2022—and found more good news for mid-size firms. Mid-size specialized firms stood out for their competitive costs and individual attorneys. Clients cited the strength of one or two laws at a firm as driving favorability.
Moreover, the report emphasizes that clients want the greatest “bang for the buck,” as opposed to simply the lowest price. Clients are very aware of costs but also are willing to pay more for firms that produce high quality work in efficient and cost-effective ways. This could help explain why, in the midst of large firm layoffs, mid-size firms have increased their number of associates by 0.6% between January and June 2023.
In today’s world, the landscape for law firms is constantly evolving. Maintaining a solid financial position is critical if firms are to respond to unexpected developments promptly and with agility.
For more information, contact Joy Long at [email protected] or 312.670.7444. Visit ORBA.com to learn more about our Law Firm Group.