Law firm profitability fell for a fifth consecutive quarter in Q4 2022, according to the Q4 2022 Thomson Reuters Law Firm Financial Index (LFFI) powered by Financial Insights out today (14 February).
The report notes that demand, productivity, and expense challenges “have nearly eaten through the record profit gains of 2021,” yet some promising signs are emerging amid the continued slide.
Profits per lawyer fell 4.5% in Q4 compared to Q3 when measured on a rolling 12-month basis. Demand saw a sharp drop of 3.9% compared with a year earlier. The report suggests that one of the leading indicators for 2023 may be whether macroeconomic conditions, such as inflation, continue to improve, leading to a recovery in demand in transactional practices, which drove much of the growth in 2021.
Despite the decline in profits, law firms maintained their level of investment in technology compared to the same period a year earlier. This is particularly notable given findings of the recent 2023 State of the Legal Market Report, which suggested law firms are dealing with a myriad of challenges.
“Law firms are at a bit of a crossroads as they face weaker demand and inflationary pressures,” said Paul Fischer, president of legal professionals at Thomson Reuters. “Our Financial Insights data notes that firms are moderating their expense growth and generally maintaining their headcount, so they could be well positioned for improved profitability if demand picks up later this year.”
Law firms were particularly hard hit in Q4 by a steep drop in productivity, which fell 7.2%, the biggest decline since the depths of the pandemic in 2020.
“Current economic challenges are making it imperative for law firms to improve their operational efficiencies,” added Fischer. “Law firms should look at either maintaining or expanding their investments in technology, putting themselves in stronger competitive positions to support clients and win new business as they navigate the uncertain year ahead.”
Download a copy of the Q4 2022 LFFI report here.