Challenges and uncertainty lie ahead for US law firms in 2023 following the first drop in profits for equity partner for more than a decade, according to an annual snapshot of the sector. 

The 2023 State of the Legal Market, published by the Center on Ethics and the Legal Profession at Georgetown Law and the Thomson Reuters Institute, reveals that profits per equity partner (PEPP) fell by 4.2% in the year to November 2022 - the first full year drop in PEPP since 2009. This followed record PEPP levels in 2021. 

While firms achieved 'reasonably good' financial results in 2022, this year is likely to involve 'multiple headwinds, such as slowing demand, less client spend optimism, higher expenses, falling productivity, weakening realization, and inflation', the report finds. 

'Firms are being confronted with issues ranging from slowing demand to record-low productivity, all of which could have significant impacts on their economic and institutional health in 2023 and beyond,' said lead author James W. Jones, a senior fellow at Georgetown Law.  

Demand fell by an average of 0.1% in the 11 months to November 2022, compared with the robust 3.7% rebound in growth for all of 2021. The report attributes this collapse in demand primarily to a sharp contraction in transactional work, such as M&A, brought about by growing economic uncertainty. This has particularly impacted top-100 firms, where demand has fallen 'precipitously'.

Meanwhile, falling demand and higher lawyer headcount reduce productivity. While average hours worked per lawyer have been declining for more than 20 years, it fell sharply in 2022, reaching the lowest level ever recorded by Thomson Reuters Financial Insights, an average of 119 billable hours per month.

This means that lawyers billed an average of $98,000 less in total fees than in 2007, based on average rates for 2022.

 

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