PMI Q3: Cycle Emerging as Early Year Demand Gains Gradually Slow Throughout Year

Topics: Billing & Pricing, Business Development & Marketing Blog Posts, Client Relations, Law Firm Profitability, Law Firms, Peer Monitor, Thomson Reuters

PMI Q3

The third quarter of 2017 was marked by further slowing demand in the large law firm market, according to the Thomson Reuters Peer Monitor Index (PMI). As previously reported, the PMI, which measures the relative health and stability of the large law firm market in the U.S, declined by one point in the third quarter and settled at 49. This marked a continued the slide from the 2017 high point of 53 reached at the end of the first quarter.

However, it may be the pace of demand growth which tells the more compelling story. The recent nature of demand growth, as tracked by billable hours worked, has typically followed the same cyclical pattern over the last few years: Year-over-year demand growth peaks in Q1, and then gradually declines for the remainder of the financial year. The only exception over the last four years has been in 2014’s Q3, when demand growth exceeded the previous year-over-year quarter.

While that’s not exactly a trend that is encouraging of a turnaround in the fourth quarter of this year, there are some potential reasons for the formation of this type of cycle. One being that early in the year, new budgets allows for corporate legal departments to work on accomplishing some of the items on their agenda. However, as the year progresses, constraints on those budgets decrease legal departments’ willingness to spend on non-essential legal actions in order to help the business stay on track to meet its internal budget obligations.

Indeed, there certainly are more questions than answers when it comes to this trend, but some things may be explained by looking more closely at the parts that constitute it.

PMI Q3

This slowing of demand throughout the year is not found in all segments. In fact, the Am Law 100 and Midsize law firm segments haven’t really experienced a cyclical trend like this. The Am Law Second Hundred is not the same story, however. In that segment, each year demand growth has been slower in each comparable quarter for firms, with the sole exception being 2017’s Q2. The similarities between the trends depicted in the aggregated overall as well as in the Am Law Second Hundred illustrate the fact that in large part, this trend is driven by the performance of the struggling segment.

At the current rate, 2017 is on pace to finish with overall demand contraction in the US large law firm market. In order for demand not to decline year-over-year, the current three-year cycle of a slowing each sequential quarter in a financial year would have to be reversed.

With the performance of this year’s Q3 bringing a contraction of 1.9%, there is plenty of room for that reversal to happen. After all, “trends” are just that, a trend. And if there is one thing that watching trends has shown us, it’s that at the exact moment in which some pattern becomes discernible, is usually the same moment we will either see the trend cease or become cemented as a mainstay of how the markets are now.