Q4 Financials; Diversity Data; Bullseye on Southeast

Q4 Financials
According to Thomson Reuters’ Law Firm Financial Index Report released Monday, overall demand in Q4 2022 fell 3.9% compared to Q4 2021 (LFFI Q4 2022 Executive Report, Thomson Reuters, 2/14/23, aggregating data from over 160 law firms).  All of the monitored practices showed decline, with M&A continuing to lead at -16.6%. 

Despite the year-over-year decline, it is worth remembering how busy 2021 was.  In fact, when compared to Q4 2019 (the most recent pre-pandemic year), overall demand in Q4 2022 only contracted .2%, and transactional demand was actually up 1.4%.

Despite demand declining in Q4, worked rates were up 4.4% over Q4 2021, largely due to rate increases implemented at the beginning of 2022.  As noted in prior commentary, significant rate increases were planned for 2023 as well.  According to anecdotal evidence from pricing consultants and observers, many firms have been successful in raising rates 7% to 8% in 2023, with some “premium brands” proposing increases as high as 30% (No Clear Winner in Faceoff over Outside Counsel Fees, Maria Dinzeo & Jesse Yount, 2/2/23, Corporate Counsel, quoting Argopoint’s Jason Winmill).

Wolters Kluwer’s Nathan Cemenska noted that most firms are deploying “distributive bargaining, where they name a big number and then it gets whittled down from there” (As Law Firms Push Aggressive Rate Increases, Clients Have Room to Negotiate, Andrew Maloney, 2/15/23, American Lawyer).  Cemenska further noted that rate increases are not inevitable, citing a recent ELM Solutions report that analyzed $155 billion in legal invoice data from 2022 and found that 32% of time-keepers in the AmLaw 100 received no rate increase that year (LegalVIEW Insights: Law Firm Rate Increases, Nathan Cemenska, February 2023, Wolters Kluwers ELM Solutions).

Diversity Data
Leopard Solutions, which scrapes law firm web profiles for biographical and practice data, released its 2022 State of the Industry Report last month.  Leopard noted that women accounted for 50% of associates in the AmLaw 200 in 2022 and only 27% of partners (2022 State of the Industry Report “Leopard Report”, Leopard Solutions, 1/24/2023).  Attorneys of color represented 28% of associates and only 12% of partners (Leopard Report).  Leopard’s statistics mirror data shared by the NALP Foundation in its recent report (2022 Report on Diversity in U.S. Law Firms, NALP Foundation, 1/12/23, aggregating data submitted by firms to NALP for inclusion in its Directory of Legal Employers, which includes over 99K attorneys across 825 offices).

According to the Leopard Report, AmLaw 200 firms have hired more women than men as entry level associates in every year since 2017.   According to NALP, 43% of summer associates in 2022 were students of color.  These summer associate and entry level demographic trends will likely move the needle on diversity in the profession over time.   Whether these trends will result in more diverse equity partnerships years down the road remains to be seen.

Bullseye on Southeast
2023 has begun with several significant combinations of firms within BigLaw, as well as acquisitions of boutiques by BigLaw (Trendspotter: Mergers and Rate Hikes are Poised to Create a Whole New Crop of Law Firms, Zack Needles, 1/31/23, Law.com).  The Southeast in particular is drawing attention; more than half of law firm leaders in a recent survey (59%) noted that their firms were targeting the Southeast in their expansion plans (Southeast Emerges as Top Legal Market for Expansion, Jacob Polacheck, 12/5/22, Law.com, citing 2022 Law Firm Business Leaders Report from the Thomson Reuters Institute & the Center on Ethics and the Legal Profession at the Georgetown University Law Center).  In fact, 2022 saw AmLaw 200 firms open 12 offices in North Carolina, second only to California (18); nine firms outside of the AmLaw 200 opened offices in North Carolina as well (Leopard Report).

Patrick Fuller of ALM Intelligence notes that North Carolina is still relatively underpopulated by the 350 largest U.S. firms by headcount as reported by the National Law Journal “NLJ 350” (Midsize Law Firms Face Difficult Path in Determining Where to Open Offices, David Gialanella, 12/30/22, American Lawyer) (only 19% of the NLJ 350 had an office in NC midway through 2022).