Falling demand, declining profits and rising expenses have created a challenging climate for law firms in 2023, a new industry report warned, with more layoffs likely as clients tighten their belts and move work to lower-priced firms.

Profits per equity partner at large and midsized law firms fell 4.2% over the 12 months ending in late November, according to a report issued by the Thomson Reuters Institute and the Center of Ethics and the Legal Profession at Georgetown Law.

Accompanied by rising inflation, the drop in profits leaves partners feeling “significantly less well-off” than they did during the banner year of 2021, the report said.

After growing 3.7% in 2021, demand for law firm services fell 0.1% by the end of November 2022, the authors found. That contraction was fueled largely by declines in transactional work and general uncertainty about the direction of the economy.

Lawyer productivity hit a more than 20-year low, with attorneys at large and midsized firms billing an average 119 hours per month, down from 122 in 2021.

Law firms also remain saddled with relatively high attorney headcounts following a 2021 hiring boom, driving a more than 10% year-over-year increase in direct expenses, the report found.

Midsized law firms have reason to be optimistic in 2023, he said. They saw a smaller decline in demand than larger firms and were the only segment of the market that had a demand increase in non-transactional practices, indicating that clients are looking for lower-price options.