EAGAN, Minn. — As 2016 came to a close, there was little to cheer about in the large law firm sector as Thomson Reuters Peer Monitor Economic Index (PMI), which measures the relative health of the large law firm market, remained unchanged for the second consecutive quarter at 48.
The fourth quarter ended essentially in a draw, as reduced expenses helped offset a deepening slump in demand. The last quarter of 2016 saw demand drop 1.4% — the third consecutive quarterly decline and the biggest drop since the first quarter of 2013. For the full year, demand fell 0.6% — the first annual decline in demand since 2013.
Expense growth — which had been climbing steadily earlier in the year — slowed considerably in the fourth quarter, offsetting the weaker demand. Direct expenses were up just 2.9%, while indirect expenses rose 2.8%, their lowest marks of the year.
Rate growth pulled back slightly from a two-year high to 2.9% in the fourth quarter. For the year, rates were also up 2.9%, which was a noticeable improvement from the 2.7% rate growth recorded in 2015. However, as pointed out in the recent 2017 Report on the State of the Legal Market, produced by Peer Monitor and Georgetown Law, factors such as the widespread use of budget caps and continued low realization rates may be blunting the benefits of improved rate growth.
Productivity also slumped 2.8% in the fourth quarter, buffeted by a combination of weak demand and rising attorney headcount. For the full year, productivity fell 2.3% — the biggest drop since the depths of the 2008-09 recession. Headcount rose 1.6% in both the quarter and year, with the latter representing the biggest annual jump since 2012.
“Clearly, 2016 was a challenging year for U.S.-based large law firms,” said Mike Abbott, vice president, Client Management and Global Thought Leadership, Thomson Reuters. “The results reflect many of the headwinds facing legal markets in both the U.S. and globally, such as client pricing pressure, the down-market movement of certain legal work, the effective death of the billable hour owing to budget caps and growing competition from alternative legal service providers. In 2016, these factors combined to dampen firm demand, productivity and, ultimately, profitability
“Of course, there were firms that out-performed the index — some dramatically,” continued Abbott. “Firms that are willing to make bold, innovative moves to adjust their business models, delivery of legal services, rate strategies and more may find themselves best positioned to deal with these factors in 2017 and beyond.”
The PMI is produced by Thomson Reuters, and 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.
You can download a copy of the PMI report for the 4Q of 2016 here