Law firm profitability ‘dropped dramatically’ in first quarter amid 12% increase in partner compensation

Law firms

Law firm profitability ‘dropped dramatically’ in first quarter amid 12% increase in partner compensation

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Law firm profitability declined in the first quarter of the year, with direct expenses up 13.1% and overhead expenses up 9.9% from the same period last year, according to the Thomson Reuters Law Firm Financial Index.

Law firm profitability has fallen sharply due to rising expenses, including increasingly costly competition for talent,” according to a May 9 Thomson Reuters report. Press release.

First-quarter partner compensation rose 12.1% from a year ago, according to the index, which was released May 9 and is based on data from major law firms. Partner compensation increased even more than 17.3% for the nation’s 100 most profitable law firms. Spending on technology also increased by 8%.

Profitability continues to grow “but at levels nowhere near the outsized gains seen in 2021,” Mike Abbott, director of the Thomson Reuters Institute, said in the press release.

Another key takeaway is that work involving mergers and acquisitions showed signs of slowing growth in the first quarter, “a potentially troubling indicator,” according to a separate Thomson Reuters summary and the index report, available here.

Spending growth offset other positive aspects of the financial measure. Demand for law firm services is up 2.7% from the same quarter last year, while billing rates are also “in positive territory”, according to the report.

The Law Firm Financial Index is a rebranded version of the Peer Monitor Index. Both indexes developed a composite score representing quarterly changes in the drivers of law firm profitability.

The index for the first quarter came in at 46, the lowest figure since the third quarter of 2009.

“If these trends continue unabated,” the report says, “growth in law firm profitability could mirror the fall in the index.”

Hats off to Reuters and Law.comwhich covered the results.

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