Already in a position of strength in 2024, Big Law firms continued to pick up financial momentum in the third quarter, according to new industry reports, with firms themselves optimistic about performance and profitability heading into the end of the year.

Through September, firms saw “incredibly broad” demand growth and another rise in productivity, even as they increased head count, notching their seventh straight quarter of financial gains and continuing a trend of looking “fundamentally stronger than in any period in recent history,” according to the Law Firm Financial Index, published on Monday.

The index, which evaluates quarter-over-quarter drivers of law firm profitability, showed one of its highest scores ever Monday, with analysts concluding that “it looks like clear sailing for firms to outperform all but their profit heights of 2021” in 2024.

The index, a composite of quarter-over-quarter drivers of profitability such as law firm demand, rates, productivity and expenses, peaked in Q2 of 2021, at 84. In Q3 of this year, it came in at 71, the second-highest score in its nearly-two-decade history.

Relative to 2021, though, the growth is healthier and more balanced now, said Bill Josten, strategic content manager for Thomson Reuters, which publishes the LFFI.

Back in 2021, as the LFFI score spiked, “We knew, ‘This has gotta come crashing down.’ We knew when we wrote the 2021 LFFI [reports], that 2022 was gonna be rough,” he said. “As we write the 2024 LFFIs, we see a lot more of a solid base for growth. Now, does that mean it will continue on that upward trend? No, it will have to level out at some point. But we don’t have that in the back of our minds.”

The report showed demand up 3.6%, with worked rates—those billing rates that are agreed upon between firms and clients—up 6.5%. Productivity, which had been mired in a long-term decline, increased again, by 1.7%, even as firms grew full-time equivalents by 2%.

That’s another sign of healthy growth, Josten said. Relative to the “surge hiring” during the transactional boom in 2020 and 2021 that ultimately ended in many layoffs, firm leaders are “becoming very skilled at keeping that balance” in hiring and demand, he added.

The only practice area tracked by the LFFI report that saw a demand dip was IP work, which fell a mere 0.2%. Litigation (4%) continued to lead the way, with corporate (2.6%) and even M&A (0.8%) getting into positive territory.

Although the LFFI noted that direct expenses (up 5.7%) and overhead expenses (5.3%) were noticeably up, it also concluded those were “the minor cost of doing business” when weighed against firms’ other financial gains.
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Exceeding Expectations

Firms themselves were also bullish about their performance this year. Nearly two-thirds of law firms said they’d exceeded their own expectations through Q3 this year, according to the ALM Q3 2024 Flash Survey, published earlier this month.

The survey found 63% of all responding law firms have exceeded profitability and performance expectations set entering the year, “up from 49% of respondents who reported positive results after Q2 2024,” the report stated. Among Am Law 200 respondents in particular, 59% said they’d exceeded expectations so far, compared to 67% of unranked respondents.

A majority of law firms in the survey are also bullish about 2025. About 52% of Am Law 200 firms said they expect demand and revenue to increase next year, while only 5% thought it would soften.
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Questions About 2025

Still, “plenty of uncertainty remains,” the ALM report noted, as 43% of the top 200 firms said they weren’t sure what demand and revenue would look like.

Indeed, the Thomson Reuters LFFI report also ends with a note of caution—that it “is unlikely that law firms’ climb will continue much higher in light of the latent challenges that might erupt in 2025.”

Josten, the strategic content manager for Thomson Reuters, said questions remain over the incoming Trump administration’s policies, how inflation will adjust, and how the U.S. Federal Reserve will set interest rates.

“As we talk to general counsel, a lot of their businesses are waiting for stability in interest rates, and the signals from the Fed have not necessarily been stability,” Josten said.

Meanwhile, it may be difficult for law firm financial metrics to get much higher, Josten said.

“Now nothing is impossible. But as we look at the indicators, we’ve seen several years of really, really strong performance. We’d love to see that continue,” Josten said. “But I don’t know how much larger some of these numbers can get.”