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Law firm productivity down in third quarter — too many associates, too little to do
November 26, 2008
Associates at large law firms have too much time on their hands.
The West Peer Monitor Index — a measure of legal market conditions — found that large law firms had the lowest productivity during the third quarter of 2008.
Overall, law firm productivity was down by 4.5% in the third quarter, but it sunk by 6.5% at larger AmLaw 100 firms — law firms with the highest revenues as ranked by The American Lawyer, an affiliate of The National Law Journal — said Mark Medice, the national manager of the Peer Monitor. The index report attributes the low productivity level to large firms having too many associates with too little to do.
"In spite of the various reports of layoffs and firm contractions, the factor that looms largest is the swelling of unproductive associates in firms," the report reads. "This is especially true with the large firm segment, which is experiencing the lowest productivity in the industry."
The West Peer Monitor Index report is published by West, a Thomson Reuters company.
Many of the larger firms are experiencing lower productivity because the type of capital markets and securities work that they handle has dried up in recent months, leaving some of their attorneys idle, Medice said.
"The higher-end firms have had aggressive hiring patterns in recent years. Even though they have slowed down, it hasn't kept up with the reduction in demand," he said.
Layoffs have become increasingly common at major law firms, but those staff reductions have lagged behind the falloff in demand for legal services, further pushing down productivity. Still, the legal industry is definitely in downsizing mode.
Associate hiring has declined by 6% compared to a year ago, and law firms are offering equity partnerships to half as many attorneys as they did the previous year, according to the index. Lateral growth, however, was about the same as it was in 2007.
With respect to demand for services, billable hours dropped by 2.5% during the third quarter, according to the index. That reduction followed a 2% decline in billable hours in the second quarter of 2008, according to the previous index. The dropoff in billable hours during the third quarter was especially steep in July and August — 5% — but demand rebounded in September to bring up the quarterly average.
Some areas were hit harder than others regarding declining demand for services. New York saw billable hours decrease by just over a half a percent, while Washington saw billable hours decline by 4.5%. Both Los Angeles and Chicago saw billable hours drop by 2%, according to the index. Certain regional markets did better, however. Austin, Texas, was among the areas that saw steady demand for legal services.
The international legal market wasn't immune to slowdowns. The Middle East still experienced growth, but expansion slowed in Beijing. Established markets such as Frankfurt, Germany; Tokyo; and Hong Kong saw demand for legal service shrink.
Law firms have been waiting for countercyclical practice areas to pick up amid the down economy, and it appears that the increase has finally starting to happen. Fees collected for bankruptcy work increased by 17% in the third quarter, compared to a 5% increase in the third quarter of 2007. Regulatory work and litigation also began to heat up, according to the report.
Not surprisingly, growth in corporate work was slow, and fees for capital markets work dropped by 2%. Mergers and acquisitions and intellectual property litigation also saw growth drop off.
Overall, law firms were successful in containing their expenses during the third quarter. Overhead expenses grew by 6%, compared with 8.3% in the third quarter of 2007. Direct expenses grew by 8 %, compared with 9% growth last year.
Collections remained a serious question for law firms, however.
"A primary concern is [fourth quarter] collections," reads the report. "Many firms are experiencing collection issues and are taking precautionary actions now to mitigate any downside effects on profitability."
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