In the midst of 2023, U.S. law firms continue to grapple with an excess of legal professionals, marking a concerning trend outlined in a recent report by a unit within Wells Fargo. This comprehensive study delved into legal industry data from over 130 firms, encompassing 66 of the nation’s highest-grossing entities.
The analysis revealed an alarming dip in productivity among the surveyed law firms during the initial half of 2023. During this timeframe, attorneys recorded an average of 1,538 billable hours, representing a stark decline of 150 hours compared to the same period in 2021, which marked a peak in billable hours.
Owen Burman, a senior consultant from Wells Fargo’s conducting unit, expressed alarm at these figures, stating, “We’ve never seen numbers this low.” The primary challenge faced by law firms in the immediate future stems from the incongruity between the number of lawyers they employ and the level of client demand for their services.
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While several law firms have taken the route of attorney layoffs since November, others have chosen to retain their personnel, optimistically anticipating a favorable shift in the market conditions, according to Burman.
Despite a noticeable reduction in hiring activity, resulting in some firms deferring start dates for new hires, the Wells Fargo survey documented a 3.9% increase in the total number of full-time employed lawyers within the surveyed firms during the first half of the year.
In terms of demand for legal services, the report revealed a 0.4% decrease during the initial six months of 2023 compared to the corresponding period in the previous year, which witnessed a modest 0.2% increase in demand.
Remarkably, even in the face of declining demand and productivity, law firms managed to achieve a 4.4% growth in revenue during the first half of the year. This feat was accomplished primarily through strategic hikes in billing rates, an aspect highlighted by the Wells Fargo survey. The report went on to describe these rate increases as “some of the highest growth in billing rates we’ve seen.”
However, despite this uptick in billing rates, the revenue growth demonstrated by the surveyed firms failed to match the pace set in the prior year. In the first half of 2022, law firm revenues experienced a more substantial growth of 5.7%.
Looking at the financial landscape of the firms, the report showcased a mere 0.4% increase in net income throughout the initial half of 2023. Yet, the profits attributed to equity partners, who hold ownership shares in their respective firms, dropped by 1.3%. This decline was attributed to the expansion in the number of equity partners.
Considering the global context, the M&A (mergers and acquisitions) activity at a global scale diminished to $1.3 trillion during the slowest first-half period for deal-making since 2020, as reported by Refinitiv.
In light of these challenges, Burman noted that law firms are placing their bets on an improved M&A market during the latter half of 2023. He emphasized that firms are keen on retaining their existing workforce and optimizing their current situation.
The legal industry in the U.S. is navigating a complex landscape characterized by a surplus of lawyers, diminished productivity, and a delicate balance between demand and resources. The industry remains cautiously optimistic about an anticipated market upturn, striving to adapt to the evolving dynamics while seeking ways to sustain profitability and growth amidst adversity.
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