Q2 PMI Analysis: Is it Really the Best of Times for Law Firms?

Topics: Data Analytics, Efficiency, Law Firm Profitability, Law Firms, Midsize Law Firms Blog Posts, Peer Monitor

Q2 PMI

“It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness…” — Charles Dickens

Charles Dickens’s famous opening paragraph of Tale of Two Cities is one of the most acclaimed literary phrases ever written and frankly its antithetical prose perfectly captures the current legal services market for law firms, just as it did the state of Europe in the late-18th century.

It is indeed the best of times because the progression of technological advances have allowed law firms to become much more efficient in the execution of their craft, while being able to expand their offerings beyond the traditional model. Also, it is the worst of times because the change and sacrifice needed to amend or break any industry or traditional model of business never comes at a favored pace. Such has certainly been the case for law firms, even as the market moves past some of the tumult of 2016.

The Thomson Reuters Peer Monitor Index (PMI) in the second quarter of 2017 dropped 3 points to 50 — which makes plenty of sense when it’s prefaced by the notion that the average law firm’s demand (-0.1%), rates (2.8%) and productivity (-2.5%) “growths” were all down relative to last year’s second quarter growth. Add to that mix, an increase in direct expenses — fueled by a full-year’s impact of the new increased salary wages garnered by associates — in a majority of the largest law firms, chiefly Am Law 100 firms.

The underlying volatility in law firm performance over the past few years, however, is emblematic of the mature market that law firms have been experiencing in the more traditional way of providing legal services. In that sense, it is the worst of times — albeit still better than a few years ago.

Q2 PMI

But such is not true for all law firms. After 2016, a year in which Midsize firms enjoyed comparative success in growth metrics, such as demand and cumulative fees worked, the first half of this year (including the second quarter) has proved more beneficial to the largest revenue-based law firms.

Am Law 100 firms grew Q2 demand an average of 1.1% compared to last year, while Midsize and Am Law Second Hundred firms found their fortunes of growth to be contradictory to the Am Law 100, contracting 0.9% and 0.6% respectively. While the overall law firm market demand seems to be relatively flat, understanding where in the market the prevalence of demand will be has been somewhat of a guessing game over the last handful of years. Firms can find growth, but often what is new to one firm is what is lost by another. In this way, perhaps, it is the best of times — but only for some.

Dickens aptly described the current business environment for law firms in the second line: “it was the age of wisdom, it was the age of foolishness.” Some 30-plus years ago, when all pretenses of limitations on commercial use of the internet lifted, AOL and other commercial networks came online and gave us nuanced access to the internet and something called “E-mail.” Now, we have unfettered access to the most collective knowledge and wisdom in history at the click of a button. That access has led to what author Jim Blasingame has called the “most transparent era of management fundamentals”, but as he states, “it’s one in which you have to risk what you know for what you might learn.”

The old operational gaps in efficiencies and knowledge between large firms and midsize firms are shrinking at a swift pace, contributing to the unearthing of this mature market for law firms and volatility of a zero-sum game of sorts, due to new entrants (e.g., alternative legal service providers) to the market.

For those willing to risk the status quo and garner that low-hanging fruit of knowledge, the opportunities can be endless and the rewards tremendous. Those unwilling to utilize that knowledge will risk assuming the role of spectator to the continued evolution of legal services that has begun to level the playing field between firms (and other legal service providers) of all different sizes and scopes.

The flip of segment fortunes witnessed between Midsize and Am Law 100 firms so far this year is not a new phenomenon. Such inversions are highly likely to be repeated in the future.

The big question will be, for which legal players will it be the best of times and for which will it be the worst?