After soaring to record levels in 2021, law firm profitability continues to slide in 2022 because of the inevitable cooling off in demand and rebound in expenses. After surging to an all-time high in Q2 2021, the Thomson Reuters Law Firm Financial Index (LFFI) has now fallen for a fourth consecutive quarter – the longest such slide in the index’s history.
Demand for law firm services slipped 0.5% compared to a year ago as corporate work, which drove much of the growth seen in 2021, fell 0.7%. The decline was even more pronounced for corporate mergers and acquisitions work, which dropped 4.9%.
Expenses continued to surge at double-digit rates, owing to a combination of inflation, competition for talent, and firms moving to hybrid or in-office working arrangements. Direct expenses rose 12.4%, only a slight moderation from the 13.1% increase seen in Q1. Associate compensation, especially for Am Law 100 firms, was the principal driver.
Technology spending grew at its fastest pace in eight years, with growth averaging 10.5%. The significant rise in spend may indicate firms are increasing their investment in legal tech as information technology prices historically tend to be deflationary.
Profit-per-lawyer fell 3.6% in the second quarter compared to a 12-month rolling average that ended in Q1 2021. Profits had risen steadily in 2020 and 2021, even throughout those stages of the pandemic, but have now declined for two consecutive quarters.