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So much for a swift recovery of the U.S. economy propping up the legal industry. Demand for legal services and law firm productivity fell slightly during the third quarter of 2010, according to the latest Hildebrandt Baker Robbins Peer Monitor Index. The overall index, which tracks demand for legal services, attorney productivity, billing rates and direct and overhead expenses at large and midsize law firms, was down by 2 points compared to the second quarter of 2010. It was the third consecutive-quarter drop following a steady climb throughout most of 2009. The index bottomed out at the start of 2009 after a three-quarter decline prompted by the economic meltdown of late 2008. “This wasn’t a surprise, but it was a disappointment,” said Mark Medice, the Peer Monitor program director. “I was expecting it to be flat. We’re dealing with a legal economy where the longer things stay neutral, the more you will see a divergence in law firm performance.” Demand for legal services, defined as the growth in billable hours, was down by 1% compared to one year earlier. Demand was flat during the first half of 2010. While demand for bankruptcy services was still high by historical standards, it fell off by 7% compared to one year earlier. Intellectual property litigation, trusts and estates, and litigation were areas in which demand weakened during the past year. Several areas saw an increase in demand, including mergers and acquisitions (up by 4%), tax (up by 2%) and real estate (up by 2%). Some cities fared better than others during the third quarter. Demand for legal services increased by 1% in Houston, while in Los Angeles it remained flat. Demand fell by 1% in Washington, San Francisco and Chicago, while in London it fell by 2%. In New York, demand fell by 3%. The slight drop in lawyer productivity during the last quarter — by about 0.5% — may prompt some firms to re-evaluate their plans regarding deferred associates who are slated to start working in early 2011. The past year also saw one of the lowest billing rate increases of the past three years — just over 2%. “Rate pressure remains one of the greatest issues for law firms today,” Hildebrandt said. “Since many of the headcount reductions were completed during the first half of 2009 and the deleveraging process is now largely behind us, this quarter’s data may represent a more complete picture of current rate growth. We believe the overall industry rate growth will continue to be weak for the foreseeable future.” Firms have been successful when it comes to cutting expenses, however. Direct expenses, including attorney salaries and benefits, were down by 7% during the third quarter compared to one year earlier. Overhead expenses, which include offices expenses, marketing and technology, were down by 1.5%. Still, these declines were not as dramatic as they were during previous quarters, when firms aggressively cut attorney jobs and other expenses, Hildebrandt concluded. Medice expects slight growth in demand during the fourth quarter of 2010. “Any improvement is likely to be slow and uneven at best, and even if the economy improves, sluggish demand for legal services and continued pricing pressures from clients will make it difficult to attain any significant gains in top-line growth in the near future,” Hildebrandt concluded. Karen Sloan can be contacted at [email protected].

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