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US Law Firms Face Continued Financial Challenges After Productivity Declines

U.S. law firms continue to be swollen with excess lawyers halfway through 2023, according to a new report from a Wells Fargo unit that tracked and analyzed legal industry data from more than 130 firms, including 66 of the highest-grossing U.S. firms.

The law firms surveyed by Wells Fargo’s Legal Specialty Group reported a drop in productivity during the first six months of 2023. Lawyers so far this year have logged an average 1,538 billable hours during that time period – 150 fewer hours than in the first half of 2021, when average billable hours peaked, according to Wells Fargo.

“We’ve never seen numbers this low,” said Owen Burman, a senior consultant in the Wells Fargo group that conducted the survey.

Wells Fargo said law firms’ biggest challenge in the near-term is that client demand for their services does not justify the number of lawyers they have.

While more than a dozen law firms have announced attorney layoffs since November, other firms are “keeping their folks and trying to wait for the market to come their way,” Burman said.

Even though law firms have sharply curbed their hiring – with some deferring start dates – the number of lawyers employed full-time at the surveyed firms increased by 3.9% in the first half of the year, Wells Fargo said.

The overall demand for legal services dropped by 0.4% during the first six months of 2023, compared to the same time last year, when demand increased by 0.2%.

Law firms managed to increase revenue by 4.4% in the first half the year, despite drops in demand and productivity, by hiking their billing rates according to the Wells Fargo survey. The report described those increases as “some of the highest growth in billing rates we’ve seen.”

Even with higher billing rates, revenue growth among the surveyed firms failed to keep pace with last year’s pace, according to Wells Fargo. Law firm revenues grew by 5.7% in the first half of 2022.

Net income — which is distributed to the equity partners who own a share of their law firm — increased by a scant 0.4% during the first half of 2023. But profits per equity partner dropped by 1.3% due to an increase in the number of equity partners, Wells Fargo found.

Global M&A activity shrank to $1.3 trillion in the slowest first-half deal making period since 2020, according to Refinitiv.

Burman said law firms are betting that the M&A market will improve in the second half of 2023.

“They’re looking to hold onto the people they’ve got and make the best of it right now,” Burman said.

Source : Reuters



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