A recent Law.com story by Patrick Smith, “Overall Demand Down for Big Law, But Rate Growth Hits All-Time High. Why?,” reports that the overall demand for legal services dropped 5.9% from the same point last year, marking the largest drop in year-over-year quarterly demand since 2009, according to the Q2 peer monitor index from Thomson Reuters. But within that drop, the average rate billed jumped up 5.2%.
The report, which is a composite index derived from data collected from 160 major law firms in the United States and some international markets, gave the legal industry a score of 51, down six points from the previous quarter’s rating. For context, the index gave the industry a rating of 65 after three quarters in 2019.
On top of the decline in overall work, the index found that the productivity rating also declined, diving 7.2%. The significant decline in productivity is likely due to the head count increases over the previous 12 months and not enough work to go around, the report concluded.
That lack of work can be highlighted by the decline of several major practice areas over the past several months, with real estate (-12.2%), patent litigation (-10.6%), tax (-9.1%), litigation (-7.5%) and corporate (-5.5%) leading the way. There was one area that the index referenced as showing growth: Bankruptcy is up 6.2%.
But even with those declines across most practices, the worked rate rose. While daily demand per FTE (full-time equivalent) for all lawyers was down 7.1%, partner demand was only down 4.4%, with associates daily demand per FTE down a whopping 9.4%.
What this means is that overall work is down, but the work that is left is being increasingly done by those at the partner level, and at partner-level rates. The report supposes this trend to be the result of two primary factors.
The first is that with less work available, partners are taking up matters that formerly went to associates, effectively becoming the epitome of the “eat what you kill” philosophy. The partners want to hit their hours and will take the work necessary to do so.
The other, the report said, is client driven. Economically strapped clients are coming to outside firms with only their most difficult work, thus necessitating the need for a more experienced hand to guide the ship. Exit associates, enter partners.
The end result is a billed-rate growth at an all-time high, a full point higher than in the first quarter of 2020, which for U.S. firms was largely unaffected by the pandemic. As expected, and to the delight of those who monitor profit margins, expenses for firms were down. The first quarter of 2020 saw direct expenses growth at about 5%, while Q2 saw only 2.3%. Overhead growth in Q1 was slightly above 4%, while in Q2 it was only up 0.1%. The report also found that firm expenditures saw a rise in spending on technology of 4.6%, while money for office space went down 5.6% and the overhead for marketing and business development dropped a whopping 18.5%.
“These are unprecedented times for the legal industry,” Mike Abbott, vice president of market insights and thought leadership at Thomson Reuters, said in a statement. “We see law firms making rapid adjustments to better suit the current conditions—investing in productivity-enhancing technologies such as collaborative and remote work solutions, while reducing expenses in other areas such as overhead. More uncertainty lies ahead in the coming months, but firms are clearly making efforts to improve efficiency and flexibility to deal with what’s to come.”