Law firms ended 2023 on strong financial footing after a sluggish start, an industry report released on Monday found.
Fueled largely by rate growth and increased demand for countercyclical work, profits rose year-over-year among both large and midsize law firms in the fourth quarter following a dismal 2022, according to the latest Thomson Reuters Law Firm Financial Index. The index tracks key financial metrics across 173 large and midsize law firms.
Profits-per-equity partner jumped 6% among Am Law 100 firms, which are the most profitable U.S. law firms, as ranked by The American Lawyer trade publication. Am Law 200 firms saw 2.5% growth in profits over the fourth quarter of 2022, while midsize firms, defined in the report as those outside the Am Law 200, saw profitability inch up .3% according to the index.
Each segment of firms saw profit declines of 4% or more in 2022, though 2023’s profitability gains fell short of the double-digit increases law firms enjoyed in 2020 and 2021.
Law firms showed “resilience” in 2023 by “aggressively” raising rates while also reining in costs, especially those tied to associates, said Tommy Williams, interim general manager of global and large law firms at Thomson Reuters, of which Reuters is a subsidiary.
Overall, law firm demand was up nearly 2% year-over-year, but it varied significantly by practice. Demand for transactional practices remained stagnant in the fourth quarter, while demand for countercyclical practices, those areas that perform well in a rocky economy, was up: litigation demand rose 3%, and bankruptcy increased more than 6%, the index found. Labor and employment demand was up nearly 3%.
Lawyer productivity continued its recent slide, with lawyers billing an average 115 hours per month in the fourth quarter of 2023. That’s the lowest figure since at least 2005, according to the index. Technology and alternative fee arrangements are reducing the direct connection between hours worked and profitability, the report noted.
Increasing that 115-hour average will be difficult, said William Josten, senior manager for enterprise legal content at the Thomson Reuters Institute.
“We’re not likely to see massive demand surges," he said. "And we’re not likely to see massive reductions in headcount either.”
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