Law firms saw their overall performance improve in the second quarter as demand for bankruptcy and litigation services ticked up, according to the Thomson Reuters Institute Law Firm Financial Index (LFFI).

The LFFI rose to its highest level since the first quarter of last year after several quarters of declines. The LFFI score hit 50 in Q2, six points higher than the opening three months of the year, supported by a growth in activity (notably for counter-cyclical services that are more in demand during periods of economic stress) and continued growth in billable hours worked. Counter-cyclical demand grew 2.8% in the second quarter compared to the same period in 2022, while worked rate growth hit 5.9% from 5.5% in Q1. That was also underpinned by a pause in declining realisation rates.

Growth in litigation – partly due to counter-cyclical reasons, but also as pandemic backlogs clear – has helped offset the ongoing drop in transactional work. Litigation demand was up 4%, just behind antitrust and regulatory (4.6%) and bankruptcy (5.7%). Corporate work flatlined (up 0.1%), while M&A work slumped -6% and real estate -8.4%.

Despite improved demand, productivity levels remain strained, with productivity dropping 2.6% in Q2 and hours worked per lawyer remaining at decade-long lows, the Thomson Reuters Institute said.

Expenses also remain a problem. While Am Law 100 firms have cut headcount by 2.5% since the start of the year, keeping direct expense growth steady in Q2, overhead expenses are proving harder to get under control – return-to-office costs remain elevated (albeit expanding at a slower rate of 3.3% compared to 8% during the same period a year ago), with core expenses broadly unchanged.

The Thomson Reuters Institute says different sized law firms are all facing similar problems, including the drop in transactional demand, fading utilisation and rising expenses, though firms are adopting different solutions to the problem. Large firms are seeking to cut expenses and improve efficiency, while mid-size firms have been seeking to bolster revenue. Both strategies are helping to slow losses compared to Q1. 

However, fees worked (a proxy for revenue growth) grew at 7.6% in Q2 on average, outpacing growth in total expenses for the first time in a year, which could indicate firms are about to enter a period of sustainable profitability, the Thomson Reuters Institute said.

The US-focused report is based on information from Thomson Reuters’ Financial Insights competitive intelligence platform.

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