Hours Drop; Collections Lag; yet Lateral Market Maintains Momentum

All practices, except real estate, logged fewer hours in Q2 2022, compared to Q2 2021, according to Thomson Reuters’ Law Firm Financial Index “LFFI”, analyzing data from over 160 law firms (for chart with practice breakdown, click download pdf below). But it is helpful to put the “slowdown” in context.   Compared to Q2 of 2019, the last pre-pandemic/ non-anomalous year, transactional practices were up 5.7%, while non-transactional practices were down 3.3%.  In this light, attorneys in some transactional practices are likely getting a much-needed “breather” while still contributing significantly to the profits of their law firms.

Rate growth of 4.7% in Q2 2022 helped to prop up revenue, despite the drop in demand (hours worked) and a 3.5% drop in productivity (hours per lawyer), relative to Q2 2021.  But the biggest impact on profits is likely to come from expenses; direct expenses (compensation & benefits for all attorneys except equity partners) were up 12.4% over Q2 2021; overhead expenses were up 13.5%.  Absent significant demand growth in the second half of the year, it is doubtful that firms will experience 2021 levels of profit growth at year end.

Collections Lag

Results from a quarterly survey of 197 law firms by Citi Private Bank’s Law Firm Group echoed many of the same themes as the LFFI Report (The Pressure is On: Demand Dip, Rising Expenses Squeezed Profits in First Half of 2022, Gloria Gomez-O’Rourke and Gretta Rusanow, 8/15/22, American Lawyer “Citi Survey”).  Demand and productivity fell from last year’s high bar, but are still stronger than pre-pandemic levels. 

Additionally, the collection cycle appears to have lengthened.  Citi’s analysts report 9.6% growth in accounts receivable and a 9.2% increase in unbilled time largely due to matters being put on hold amid volatility (Citi Survey).

Lateral Market Maintains Momentum

Economic uncertainty and demand drops appear to have had little effect on the lateral market.  Leopard Solutions, which tracks attorney movement by scraping attorney profile data from over 4,269 law firms, recorded more lateral moves in each category (Partners, Counsels, and Associates) in the first half of 2022 than in the first half of each of the previous three years (2022 Mid-Year Update, Leopard Solutions).

Although the drop in demand may make firms more reticent to engage in lateral associate hiring, the breather also gives partners time to pick their heads up, assess their platform and explore the lateral market.  In a period of potential profit decline, there is less optimism and goodwill toward the current platform.  Additionally, increased enforcement of return to office policies may encourage partners who appreciate the efficiencies and convenience of remote work to dip their toes in the lateral market.