Business is dropping while costs are rising at large law firms, and law grads looking for work will likely pay the price.
That’s the grim news from this economic report by Thomson Reuters.
“Demand for legal services, as measured by billable hours, dropped by 0.9 percent in the second quarter of 2016,” according to this Thomson Reuters press release. “It was the first decrease after nine consecutive quarters of increases, the longest streak since the recession that began in 2008.”
But even as business was dropping, firms were adding new lawyers at a healthy clip. Headcount rose 1.7 percent in the second quarter, continuing a year-long trend:
“The last time firms grew by so many people was in the second quarter of 2012,” the report says. “The drop in demand, combined with increasing headcounts, led to a 2.8 percent drop in productivity, the largest drop in the last three years.”
The report is based on data from 151 mid-size and large firms nationwide. It concludes that “[f]or a turnaround to occur, expenses need to be brought under control and headcount needs to be ‘constrained.’”
And of course we all know that “constrained” really means: “too bad, law grads, no jobs here.”
Legal Market “Blindsided”
Prior to this report, the legal market had been enjoying modest but steady growth. Demand had increased for nine consecutive quarters dating back to Q1 2014.
Now, a toxic blend of soaring expenses, slumping demand and declining productivity led Thomson Reuters to downgrade its Peer Monitor Economic Index (PMI) – which measures the relative health of the large law firm market – four points to 48 in the second quarter. That’s the biggest drop since Q1 2013.
The PMI draws on data from large U.S. firms and key international markets. A PMI of 65 or higher indicates strong market performance.
After several years of good news, the bleak report “blindsided” the legal market, according to the ABA Journal.
Big Hit in Real Estate, Tax Practices
Transactional practices, which had boomed in prior quarters, saw the sharpest downturn.
Corporate work dropped 0.1 percent, real estate dropped 2.3 percent, tax law dropped 3.4 percent, bankruptcy dropped 1.8 percent and litigation fell 1.8 percent.
One of the bright spots was patent prosecution, according to the report, which rose 0.2 percent.
“In short,” the report says, “firms have been consistently growing headcount for a considerable period of time beyond what is justified by demand, and that gap is now growing wider. Firms may need to re-evaluate their staffing levels and hiring plans to avoid further drag on profitability.”
- Thomson Reuters Peer Monitor https://peermonitor.thomsonreuters.com/wp-content/uploads/2016/07/PMI_Q2_2016_FINAL.pdf
- Thomson Reuters http://thomsonreuters.com/en/press-releases/2016/august/peer-monitor-economic-index-slumps-in-second-quarter.html
- ABA Journal http://www.abajournal.com/news/article/law_firm_market_stumbled_in_second_quarter_rising_headcount_is_partly_to_bl