Q1 2024 LFFI: Law firms ascend with record revenues and slower expenses

As the large law firm industry advances into 2024, the Thomson Reuters Institute’s Law Firm Financial Index (LFFI) reveals a buoyant performance in the first quarter that is dominated by strong revenue factors and moderated expenses, suggesting a stable and positive trajectory for the industry.

Key takeaways in Q1

• The large law firm industry has improved its financial health in Q1 2024, driven by strong revenue performance and a slow-down in their expense growth.
• Demand growth has shifted from Midsize law firms to the Am Law Second Hundred, which has greatly increased that segment’s fees-worked growth. The Am Law 50, in comparison, has traded some demand for record rate growth.
• Adjusting for inflation, law firms’ investment in technology has reached its highest level since at least 2014. This suggests that despite stringent management of overhead costs, firms are prioritizing technological enhancements as essential for their future success.

The LFFI score has seen a modest increase in Q1 2024, which indicates an overall improvement in the industry’s financial health. This uplift is primarily driven by multiple factors but a notable development in Q1 was an acceleration in worked-rate growth with the new year’s rates, achieving its highest levels of growth since the financial crisis of 2007-2008.

The dynamics of demand growth have shifted notably in 2024, with the Am Law Second Hundred leading in demand growth, a pivot from the smaller law firm market dominance observed in 2023. This year, Am Law Second Hundred firms and those ranked in the 51-100 of the Am Law list have demonstrated substantial fees-worked growth. Midsize law firms remain competitive, but the segment’s pace has slowed compared to the previous year’s leading performance. Meanwhile, the Am Law 50 has traded some demand for record rate growth, a strategy that continues to favor that segment’s financial outcomes.

The Q1 2024 LFFI report outlines an industry on the path to continued financial health with several segments adapting and thriving in changing market conditions.

Litigation work emerged as a key driver of growth in Q1, experiencing its strongest uptick since the post-pandemic rebound in 2021. This performance strongly aligns with overall segmental demand growth, underscoring the practice area’s pivotal role in the current market landscape. Transactional work has stabilized after several quarters of decline, with small growth levels enough to sustain the new higher rates that add positively to law firm income.

Convergence of revenue and expenses

A significant observation from the Q1 LFFI report is the convergence of expense growth and revenue increments. Direct expenses grew at a decelerated rate from previous years, reflecting a cooling down from the aggressive wage growth battles of 2021 and 2022. Overhead expenses also saw a reduction from its previously high pace, even as law firms continued to invest heavily in technology. Notably, this rate of investment, once controlled for inflation, was the fastest pace of real tech investment since at least 2014, suggesting that law firms are actively jumping onto key technologies despite the economic difficulties of the last couple years.

Overall, the Q1 2024 LFFI report outlines an industry on the path to continued financial health with several segments adapting and thriving in changing market conditions. The law firm industry’s ability to manage expenses while capitalizing on strategic rate increases and demand opportunities has positioned it well for the rest of 2024 and beyond.

This robust start to the year provides a solid foundation for optimism in the law firm sector, suggesting that the strategies currently employed are not only effective but sustainable. So long as further black swan events can be avoided, law firms may finally have an opportunity to catch their breath.

You can download the Q1 2024 Thomson Reuters Institute’s Law Firm Financial Index report by filling out the form below: