Boosted by spike in negotiated rates, law firms return to profitability, report says
Law firms returned to profitability in 2023 as “worked rates” accelerated throughout the year, according to the Law Firm Financial Index report for the fourth quarter of 2023 by the Thomson Reuters Institute. (Image from Shutterstock)
Law firms returned to profitability in 2023 as “worked rates” accelerated throughout the year, according to the Law Firm Financial Index report for the fourth quarter of 2023 by the Thomson Reuters Institute.
Worked rates, the prices paid by clients after negotiations, increased 6.5% in the fourth quarter of 2023 compared to the same period in 2022, the highest increase since the 2008-2009 financial crisis, according to a Feb. 12 press release.
Demand for legal services also increased an average of 1.7% year over year in the fourth quarter of 2023, as large firms had growth in countercyclical practices, such as bankruptcy (up 6.4%), litigation (up 3%) and labor and employment (up 2.6%).
Profits per equity partner increased 6% at the nation’s top 100 grossing firms in the fourth quarter of 2023, compared to the fourth quarter of 2022, but only 2.5% for equity partners in Second Hundred firms and 0.3% for partners at midsize firms ranked below the Second Hundred.
“The last quarter of 2023 saw law firms experience positive movement across all fronts—from legal demand and billing rates to productivity and expenses,” according to an online summary of the report, available on the same page.
Although firms are experiencing growth in total expenses, the pace has slowed. Higher associate salaries could produce a “reacceleration of expenses,” the report cautions, but “but so far, this rise seems limited to those firms within the Am Law 100.”
Productivity, measured by hours worked per lawyer, decreased 0.8% in the fourth quarter of 2023, the smallest decline since 2021. But the report notes that productivity in the fourth quarter was 115 hours per lawyer per month—the lowest level since at least 2005.
Firm profits have continued to increase for most of the last 10 years, even as productivity declined.
“Billable hours worked, the market’s favored measure of demand for legal services, is simply becoming a less useful measurement,” the report says.
“As advances in technology have allowed lawyers to put more value in their hours, reflective in ever-increasing rates, and alternate fee arrangements increasingly become inevitable, it certainly seems like the revenue that a lawyer generates is becoming detached from the number of hours they bill,” the report says.
“The arrival of generative artificial intelligence promises to widen this detachment into a gulf,” according to the report.
The report covers financial metrics for 173 large and midsize firms, according to Reuters, which covered the index report.
