Law firm profitability

Law firm expenses grow, demand for services falters: report

Law firms are seeing an increase in intellectual-property litigation work but are struggling overall to attract business while their expenses rise at the highest rate in two years, according to a new study.

The Hildebrandt Institute's PMI - Peer Monitor Index measures the quarter-over-quarter change in the "drivers of law firm profitability," using factors including billing rates, demand, productivity and expenses. According to the report, a score of 65 signals a healthy operating environment. The third-quarter PMI fell six points, to 56, the first decrease in three quarters.

Peer Monitor is a Thomson Reuters product.

"Soft demand and rapidly growing expenses are really putting pressure on law firm performance," said Mark Medice, senior director of Peer Monitor.

The report found that overall litigation demand increased 1.5%, and IP litigation in particular saw a five-percent increase, the largest for the practice groups listed. Mergers and acquisitions work was down 2% and capital markets work fell 4% from last quarter. In an indication that might be better for the economy than for firms' restructuring groups, the demand for bankruptcy work declined 6%.

Firm expenses jumped by the highest rate in two years, with direct expenses rising more than 5% and overhead expenses up 3.2%.

Billing rates were also up -- 3.5% from a year ago. But that increase is marginalized by the fact that firms' "realized rate" -- the rate they are actually paid by the client -- reached an all-time low this quarter. Net collected realizations fell slightly, to 85.4%, which also represents an all-time low.

Medice pointed to Thursday's announcement by the Commerce Department that the U.S. gross domestic product grew by 2.5% in the third quarter, as indication of possible fourth-quarter improvement.

"If that carries into the fourth quarter, we'll see demand picking up," Medice said.

(Published by Thomson Reuters - October 28, 2011)

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