Apparently impregnable elite US firms are living in a false paradise and could be heading for a collapse along the lines of the one that finished off once iconic airline Pan Am. That is the conclusion of the latest annual survey of the US legal services market by data giant Thomson Reuters*. The report, published this week, paints a picture of declining productivity at Top-100 firms, which are increasing fees despite flat demand for their services.
The problem is masked by a return to profitability for the legal sector as a whole - mainly accounted for by smaller, more nimble, firms operating in 'counter-cyclical' sectors.
On the surface, the report concludes, 2023 was 'an encouraging, though not outstanding', year. 'Legal demand, worked rates, fees worked and attorney headcount all posted positive numbers, buoying a legal market that continues to be plagued by weak demand growth and declines in productivity.' The 100 biggest firms enjoyed an average 2% growth in profit per lawyer.
But while demand for legal services grew by an average of 1.1% across the sector, most of it was in areas dominated by mid-size firms. Among the largest 100, demand growth was flat. This was partly explained by the differences in demand for transactional and so-called 'counter-cyclical' work, such as bankruptcy, which grew by 4.4% in 2023. But bankruptcy accounts for only a small proportion of total demand in top-100 firms; their bread-and-butter transactional work suffered a strong decline.
Meanwhile rates continued to rise sharply, following a decade-long trend which has been accelerating since 2019. But not all these rates were realised, with firms collecting an average 90.5% of their worked rates. This was not because of client push-back but rather firms 'proactively adjusting bills downward before they were sent to clients', the report states.
Overall, while some firms have responded proactively to changes in the market, 'many have not, relying instead on tactics that served them well in the past but are no longer as effective'. The report finds a cautionary tale in the collapse of Pan Am, which continued operating ever larger aicraft from only two US hubs, ignoring competition from lower-priced competitors.
The failure of Pan Am's managers to appreciate fundamental changes in the industry 'holds an important lesson for law firm leaders today', the report concludes. This is especially because, 'market conditions have been such that the full effects of the changes have, to some extent, been masked until the economic crises of the last couple of years'.
Looking to the year ahead, corporations expect their spend on external law firms to increase in 2024, especially for regulatory advice, litigation, labour and employment. Meanwhile the potential impact of AI on the legal profession is viewed 'with a mix of optimism and caution' – 45% of firm leaders believe AI will enhance productivity and efficiency, and 38% believe the technology will free up time for higher level tasks
*2024 Report on the State of the US Legal Market, Thomson Reuters Institute.
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