New financial data indicates that law firms have kicked off 2024 on a strong note following a lackluster 2023 characterized by weak client demand and declining collections on billed work.
According to the Thomson Reuters Institute’s Law Firm Financial Index, which monitors key financial metrics across 186 large and midsize law firms, demand for legal services increased by 1.9% in the first quarter of the year compared to the same period in 2023. Billing rates, which consistently saw growth in 2023, continued to rise with a 6.6% increase in the first quarter compared to a year ago.
Midsize law firms primarily drove the growth in billing rates, contributing to a 5.7% increase in revenue and a 5.8% rise in firm profits. These increases were supported by firms effectively managing direct expense growth to just 5.4%.
William Josten, manager for enterprise legal content at the Thomson Reuters Institute, noted, “There’s lots of positivity.” Similarly, the Wells Fargo Legal Specialty Group’s first-quarter report highlighted promising signs, with demand up by 2% and revenue up by 9.5% among major firms.
The growth in demand for law firm services was mainly fueled by increases in litigation (up 3.8%), bankruptcy (up 3%), and labor and employment (up 1%). However, demand for corporate practices remained sluggish, only growing by 0.6% over the first quarter of 2023. Additionally, demand for M&A practices declined by nearly 4%, with uncertainty lingering due to persistently high interest rates.
The Thomson Reuters index, which comprises financial data from 103 firms in the Am Law 100 or 200 and 83 firms outside the Am Law 200, indicates uncertainty regarding whether law firms will be able to collect on the higher billing rates implemented at the start of 2024. Realization, referring to the proportion of billed work that firms collect on, experienced a downturn in 2023, and the realization for the higher rates of 2024 won’t be reflected until the second quarter of the year due to law firm billing cycles.
Despite modest hiring, law firms are ramping up investments in technology in 2024, with technology spending increasing by 6.6% above the rate of inflation. Josten believes this indicates firms are starting to embrace technology that holds the promise of artificial intelligence integration finally coming to market.
