Eagan, Minn., – There was little to cheer about in the large law firm market as 2016 came to a close. The fourth quarter finished in a draw, as reduced expenses helped offset a deepening slump in demand. So the Thomson Reuters Peer Monitor Economic Index (PMI), which measures the relative health of the large law firm market, remained unchanged for the second consecutive quarter at 48.

Demand dropped 1.4% in the fourth quarter – the third consecutive quarterly decline and the biggest drop since Q1 2013. After rising in the first quarter, demand steadily declined through the rest of the year – the first time the market saw three consecutive down quarters since 2010. For the full year, demand fell 0.6% – the first annual decline in demand since 2013.  

Expense growth – which had been climbing steadily earlier in the year – slowed considerably in the fourth quarter, offsetting the weaker demand. Direct expenses were up 2.9%, while indirect expenses rose 2.8%, their lowest marks of the year.

Rate growth pulled back slightly from a two-year high (3.1%) in the third quarter to 2.9% in the fourth quarter. For the year, rates were also up 2.9%, which was a noticeable improvement from the 2.7% rate growth recorded in 2015.  However, as pointed out in the recent 2017 Report on the State of the Legal Market, produced by Peer Monitor and Georgetown Law, factors such as the widespread use of budget caps and continued low realization rates may be blunting the benefits of improved rate growth.

Productivity slumped 2.8% in the fourth quarter, buffeted by a combination of weak demand and rising attorney headcount. For the full year, productivity fell 2.3% – the biggest drop since the depths of the 2008-09 recession. Headcount rose 1.6% in both the quarter and year – the latter representing the biggest annual jump since 2012.

Among the practice areas, transactional work was mixed. Corporate work has now been up for a remarkable twelve consecutive quarters, bolstered by strong M&A work, but just barely kept the streak alive in Q4, rising 0.2%. Real estate and tax work both fell 2.1% in the fourth quarter.

Litigation was down 2.7% – its weakest quarterly performance since Q1 2013. Patent litigation fell 1.5%. Patent prosecution, which had been up all year, inched down 0.1%, but was up 0.7% for the year.

“2016 was a challenging year for US-based large law firms,” said Mike Abbott, vice president, Client Management and Global Thought Leadership, Thomson Reuters. “The results reflect many of the headwinds facing legal markets in both the US and globally, such as client pricing pressure, the down-market movement of certain legal work, the effective death of the billable hour owing to budget caps and growing competition from alternative legal service providers. In 2016, these factors combined to dampen firm demand, productivity and, ultimately, profitability

“Of course there were firms that out-performed the index – some dramatically,” continued Abbott. “Firms that are willing to make bold, innovative moves to adjust their business models, delivery of legal services, rate strategies and more may find themselves best positioned to deal with these factors in 2017 and beyond.”

A copy of the Q4 2016 PMI report can be downloaded here: http://legalexecutiveinstitute.com/wp-content/uploads/2017/02/PMI-4Q-2016.pdf

The PMI is produced by Thomson Reuters, and is a composite index of law firm market performance using real-time data drawn from major law firms in the United States and key international markets. A PMI of 65 or greater indicates strong law firm market performance.

For more information on Peer Monitor, visit https://peermonitor.thomsonreuters.com

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