Law firm profitability is at near-record high, new report says
Law firm financials have improved for seven consecutive quarters, leading to a profitability score that is the second highest on record for the Law Firm Financial Index since its inception more than 15 years ago. (Image from Shutterstock)
Law firm financials have improved for seven consecutive quarters, leading to a profitability score that is the second highest on record for the Law Firm Financial Index since its inception more than 15 years ago.
Growth in demand for legal work was “incredibly broad” in the third quarter of 2024, according to the Law Firm Financial Index report by the Thomson Reuters Institute. The index—a composite profitability score based on demand, rates, productivity and expenses—increased to 71 in the third quarter of 2024, trailing only early 2021, according to the report, release Monday and available here.
The index is based on data from 195 major firms in the United States and key international markets.
Profits increased 11.2% in the third quarter compared with the same time last year, according to according to coverage by Reuters.
“It looks like clear sailing for firms to outperform all but their profit heights of 2021,” the report concluded.
After the COVID-19 pandemic, firms experienced a more rapid growth in demand because of the transactional boom. But the growth that they are experiencing now is more sustainable because it reaches so many practice areas, according to a Thomson Reuters summary.
Year-over-year demand in the third quarter increased 4% for litigation, 3.7% for real estate, 2.9% for labor and employment, 2.6% for corporate, 1.7% for bankruptcy, 0.9% for tax and 0.8% for mergers and acquisitions. Demand for intellectual property work declined only slightly, by 0.2%.
Overall, demand increased 3.6% since the third quarter of 2023.
Productivity increased 1.7% year over year. The increase in productivity was partly the result of higher demand and partly due to a “modest level of hiring” by many firms, the report said.
Worked rates (the price paid by clients after negotiation) saw a “remarkable growth” in the first two quarters of this year, according to the summary. In the third quarter of 2024, the year-over-year growth was 6.5%, down slightly from 6.6% in the second quarter of 2024, according to a Nov. 11 press release.
Direct expenses increased 5.7%, and overhead expenses increased 5.3% in the third quarter, a relatively minor increase that “hardly registers as turbulence in regard to profits” given strong revenue, the report said.
One “potential headwind” to the start of 2025, however, is that the case for negotiating higher rates is “considerably weakened” as profit peaks and inflation declines, the report said.
