- 11% of firms reduced fee earners
- 36% of firms reduced support staff
- 32% of firms reduced the salaries of support staff
- 34% of firms furloughed support staff
- 40% of firms reduced the salaries of fee earners
- 46% of firms reduced partner draws
This post was authored by NBI Director Lee Ann Enquist, Esq.
Like all businesses, law firms experienced significant uncertainty and volatility throughout 2020. Year-end results and Q4 trends, however, suggest that at least large to midsize law firms may have escaped 2020 relatively unscathed. The Q4 Peer Monitor Economic Index (PMI) produced by Thomson Reuters reached its highest point since 2006, the second highest quarterly mark ever recorded. The PMI is a composite index score which represents the quarterly change in drivers of law firm profitability. These factors include demand, rates, productivity, and expense. Higher rates, significant overhead expense reduction, and a slight uptick in key practice area demand drove profitability overall.
Although the general trend was a contraction in demand across most practice areas, bankruptcy saw a 3.2% increase YOY in 2020 according to the 2021 Report on the State of the Legal Industry issued by the Center on Ethics and the Legal Profession at Georgetown University Law Center and the Thomson Reuters Institute. Similarly, the Q4 PMI index identified corporate and tax as two practice areas that saw growth YOY in Q4.
The 2020 Law Firm Business Leaders Report describes the specific steps surveyed law firms took in response to the pandemic. Not surprisingly, the vast majority of respondents (91%) stopped or significantly reduced discretionary spend, with 59% reporting an immediate investment in technology for work continuity. Law firms, like most businesses, found themselves making hurried technology investments to rapidly deploy their workforces in a distributed model. In regards to staffing actions, the 2021 Report on the State of the Legal Industry identified the following activities:
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Other areas that saw significant expense reductions were employee recruitment, marketing and business development. Perhaps one unexpected item of note in the TR Business Leaders Report, was the fact that 48% of respondents to the TR survey took advantage of government financial support during 2020.
So, what was the overall impact of 2020 on the legal market? According to the 2021 Report on the State of the Legal Industry, overall profits per equity partner (PPEP) were up significantly YOY across large and mid-size law firms. In the Am Law 100, 2020 saw about a 22% growth in PPEP compared to 9% in 2019. In the Am Law Second Hundred, PPEP grew 20% in 2020 compared to 3% in 2019. And in midsize firms, growth of approximately 13% was reported over 2% growth in 2019.
The real question for law firms in 2021 will be whether demand will continue to grow in traditionally profitable practices areas such as litigation and whether continued cost-cutting at the levels we saw in 2020 will be sustainable.
NBI Director Lee Ann Enquist, Esq. leads the planning and execution of NBI’s sales, customer care, faculty recruitment, and accreditation strategies. She brings over 25 years experience in the legal services and continuing education fields to her current role. Prior to joining NBI, she spent over 20 years at Thomson Reuters, where she led the development and execution of Thomson Reuters’ Professional Development strategy. She can be reached at LeeAnn.Enquist@nbi-sems.com.
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This blog post is for general informative purposes only and should not be construed as legal advice or a solicitation to provide legal services. You should consult with an attorney before you rely on this information. While we attempted to ensure accuracy, completeness and timeliness, we assume no responsibility for this post’s accuracy, completeness or timeliness.
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