Law Firm Third Quarter Check Up

With stocks in a post-election plummet and yet another storm bearing down on the battered Northeast, law firms continue to provide admirable consistency.

How so? Demand for their services remains essentially flat, according to a third quarter analysis of the law firm market out this month from Peer Monitor, a division of Thomson Reuters’ Hildebrandt Institute.
Among the cheery data points:

• Litigation demand fell this quarter, evening out earlier gains to remain flat.
• Deal work continues to be in the basement, at least in aggregate. Corporate work is down 1%, and transactional practices are weak, with bankruptcy down 2.6% and real estate down 2.7%.
• While demand was up 2.5% for labor and employment — one of the few bright spots this year, practice-wise — growth has slowed to the most sluggish pace in the past two years.

“Nearly all major practices were down during the quarter,” according to the report, which is based on data from 125 large and mid-size U.S. law firms. “The law firm market continues to struggle. Weakening demand and low rate growth are challenging any meaningful top line growth while expenses, although moderating, continue to run ahead of revenues. Productivity continues to decline as capacity exceeds demand.”

Peer Monitor Index, Thomson Reuters

Searching for a beacon of hope, Law Blog called up Mark Medice, the number-cruncher behind the Peer Monitor reports.

“When the economy starts to slowly move in the right direction, that will bolster and support some firms,” Mr. Medice said. “But is that going to be nine months from now? Twelve months from now? Twenty-four months?”

And one post-recession shift looks to be permanent, he said, even if and when the economy does bounce back.

“Clients have become over the past five years way more sophisticated, and that is not going to go away,” Mr. Medice said.

That means the general counsel who supply BigLaw with work are running the data, parsing their legal bills and whipping up spreadsheets to see where they can extract the most value. For instance, some companies are opting for firms with lower rates to perform work they used to give to top-tier firms.

They’re also continuing to push hard for discounts, which Mr. Medice said has given rise to an interesting phenomenon. Law firm realization rates—the difference between hours that law firms bill, and the actual portion of the work that clients end up paying for—are at a historic low, down nearly 20% compared with pre-recession rates.

“On average most law firms have lost 11 points,” Mr. Medice said. “So for every dollar, I was collecting 95 cents on the dollar, I’m now getting 83%.”

At the beginning of the credit crisis, realization rates were lower in part because firms were having trouble collecting from their clients. This is something different, he said: Now the gap stems partly from the big discounts that clients demand.

“We’re in the early innings of adjusting what value means,” Mr. Medice said. “The same piece of work in 2012 may be worth the same or less than it was three years ago.”

Jennifer Smith , WSJ Law Blog