Would You Invest in This Industry?

Published May 7, 2013

Because it is contrary to the Rules of Professional Conduct for law firms to be owned by anyone other than the partners, no one can buy stock in a firm or read an investment analyst report about the “legal industry.” But occasionally there are statistical analyses that show how “The Business of Law®” is doing. And a recent comprehensive one by Georgetown Law School’s Center for the Study of the Legal Profession, titled Report on the State of the Legal Market, paints a grim picture indeed. Here are some “highlights:”

  • During 2012, the number of lawyers in U.S. firms grew by 2 percent, at the same time that demand for legal services grew by only 0.5 percent. As a result, productivity – defined as the total number of billable hours recorded by a firm divided by the total number of lawyers in the firm – declined by 1.5%. When measured in terms of billable hours per month per lawyer, productivity has been essentially flat for the past three years at plus or minus 130 hours per month.

  • Realization rates (amount of money billed that is collected) average 83.6 percent for all law firms studied, a figure that is an historic low and some 8 percent lower than the 92 percent level at the end of 2007. For AmLaw 100 firms, the realization rate is even lower, at 82.8 percent.

  • The firms covered in the analysis raised their rates on average 3.4 percent during 2012. While this increase was well below the 6-8 percent range seen annually during the prerecession period, it was consistent with rate trends over the past three or four years, and well above the growth in both demand and expenses.

  • Firms cut expenses dramatically from mid-2008 to mid-2010 – when expenses began increasing again. This renewed growth, at a rate of about 5 percent annually, was perhaps not surprising since many of the expense “cuts” were really only deferrals of expenditures that had to be made sooner or later rather than eliminations of specific cost items.

Demand and productivity down … prices up, collections down … expenses rising almost twice as fast as prices … Sounds more than a little like Chrysler or General Motors before they filed for bankruptcy. By any measure, these numbers do not paint a picture of an industry in good financial health.

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Audience type: Administrators, Associates, Large Law Firms, Small Law Firms, Sole Practitioners