Rising Demand Offset by Weak Rates, Productivity
The Peer Monitor Economic Index (PMI), which measures the relative health of the legal marketplace, was unchanged for the second consecutive quarter, holding steady at 54. Slightly higher demand was offset by weak rate growth and falling productivity.
The PMI is produced by Thomson Reuters, and is a composite index of law firm market performance using real-time data drawn from major law firms in the United States and key international markets. A PMI of 65 or greater indicates strong law firm market performance.
Demand1 for large law firm services rose 0.4% during the second quarter – while it was the sixth consecutive quarterly gain, it was also one of the weakest gains during that period and is down from the 0.6% gain seen in Q1.
Worked rates2 rebounded slightly to 2.9% after hitting a multi-year low in Q1. Productivity, meanwhile, fell for the seventh consecutive quarter, as firms continue to grow headcount faster than demand warrants. Headcount growth was somewhat more restrained in the second quarter, rising 1.0%. Peer Monitor analysis found that headcount growth in the second quarter was primarily among senior/staff counsel at Am Law 100 firms. Headcount has dropped sharply at the associate level, especially among those with less than seven years of experience.
Transactional practices remained strong. Corporate work rose 1.9%. Real estate was up 4.0% while tax work dropped for a second consecutive quarter, falling 1.0%. Litigation, meanwhile, fell for the twelfth consecutive quarter, dropping 0.7%.
Direct expenses and overhead expenses both were up 2.4% – slightly less than the growth rate in the most recent previous quarters.
“While the market has finally achieved more consistent growth in demand, that growth remains weak,” said Mike Abbott, vice president, Client Management and Global Thought Leadership, Thomson Reuters. “Firms need to improve their rates and better manage headcount and other expenses if they are to see stronger growth in profitability. So while firms are seeing some improvement in the market environment, many challenges still remain.”
1 Demand is defined as the growth in billable hours.
2 Worked rates are the negotiated rates as determined by the matter value. Worked rates are often referred to as agreed rates.