New data on law firm profitability in the US offers fresh evidence that the current trading year will prove less stellar for their City counterparts than the bonanza of 2021/22. Soaring overheads and a slump in dealmaking are already making a dent in earnings across the Atlantic.

The Thomson Reuters Law Firm Financial Index, powered by Peer Monitor/Financial Insights, has dropped for the fourth quarter in a row, marking its longest consecutive slide. Demand across all practice areas measured by billable hours fell 0.5% in the second quarter on the same period in 2021, with M&A down 4.9%. The only major practice area to see an increase was real estate, up 2.5%.

Overhead costs are rebounding hard post-lockdown, with the pay bill for non-partners up 12.4% year on year amid fierce competition for associates. Operational costs such as offices and technology, as well as compensation for ancillary staff, climbed 13.5%.

Investment in technology grew 10.5% for the average US law firm - the fastest rate in eight years. This suggests much of the investment is in legal technology, as IT prices prices tend to be deflationary.

Mike Abbott, head of the Thomson Reuters Institute said: ‘Last year’s tailwinds have turned into this year’s headwinds. Demand was inevitably going to drop following two years of exceptionally high growth. This combined with rising expenses, have dented profitability amongst law firms. In addition to the current inflationary economic environment, law firms are still having to grapple with issues stemming from the return to the office and hybrid working. The tight labour market has forced firms to increase compensation at associate level, in order to attract and retain the brightest talent. However, there are signs that this growth may be beginning to slow down.’

 

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