A combination of slowing demand for legal services and soaring operating expenses is squeezing law firm profits, according to a global sector snapshot published today.  

The Q3 2022 Thomson Reuters Law Firm Financial Index shows law firm profitability falling for a fourth consecutive quarter. 

Demand for legal servies was 0.7% down in the third quarter of 2022 compared with the same quarter in 2021. This follows 0.5% decline in the second quarter of 2022. M&A advisory work was 13.7% down. One of the few practice area that saw demand grow was labour and employment (0.3%), the survey reports.

At the same time, firms were hit hard by rising expenses. Direct expenses grew by 10.9%, driven by firms competing for talent, while overhead expenses rose even faster at 12.8%, due in part to the return to the office.

The combination of slumping demand and surging expenses reduced profits-per-lawyer by 2.9% compared with the second quarter, bringing it down to the lowest level since Q1 2021. However, even after the recent declines, profits-per-lawyer remain 17.6% above the levels of pre-pandemic Q1 2020. 

However declining profitability has not yet caused widespread job cuts. The report suggests that firms are adopting a 'wait it out' strategy, continuing seasonal hiring, avoiding layoffs, and absorbing the costs of taking on more talent and return-to-office expenses. 

'Law firms are finding themselves squeezed by both slowing demand and rising expenses,' said Mike Abbott, head of the Thomson Reuters Institute. 'While firm profits have slid recently, they still remain well above pre-pandemic levels. The lessons from the great recession are still on the minds of law firm leaders, and they recognize the importance of taking a long-term view on how to best position their firms for ongoing success. But doing so may present some near-term challenges.'

 

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