Law firm profits plummet amid rising costs and slowing demand, Wells Fargo says

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  • Companies unlikely to match record 2021 profits
  • Revenue increased 6%, but costs increased 14% over the past year

(Reuters) – Law firms have aggressively beefed up their ranks of lawyers in 2021 amid a boom in corporate work. But easing customer demand means those hires may not have enough work to keep them busy until the end of 2022, according to new data for the first half of this year from Wells Fargo’s Legal Specialty Group.

Lawyer headcount grew more than 5% year-over-year among the 120 large, midsize and regional firms surveyed by Wells Fargo, primarily to handle an increase in transactional work in 2021. But as the Transactional work has slowed, attorney productivity — which refers to hours worked — is down nearly 5% from a year ago, Wells Fargo found.

According to the survey, the underutilization of lawyers could become more pronounced as this year’s large classes of new partners join their firms in the coming months.

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It’s a reversal from a year ago, when the biggest challenge law firms faced was not having enough lawyers to meet growing demand, said Joe Mendola, senior director. sales for Wells Fargo Private Bank Legal Specialty Group.

“Fast forward a year later and demand has slowed down a bit,” he said. “As a result, productivity is down. In the long term, if this decline continues, it’s something Big Law will have to address. »

Companies are generally reluctant to lay off newly hired lawyers, and wealthier firms are likely to settle for temporary profit cuts before laying off lawyers, Mendola said. But other companies in the market may not have the ability to remain overstaffed, he added.

The Wells Fargo data echoes similar findings released last week by the Thomson Reuters Institute, which warned that companies are facing economic headwinds due to falling demand and rising costs. Among companies surveyed by Wells Fargo, attorney compensation costs have risen nearly 17% over the past year, while overhead costs have risen more than 14%.

Surveyed companies saw revenue increases of around 6%, which Mendola said is well below the 14% increase in revenue companies reported in mid-2021, but not outside historical norms. This revenue growth was largely driven by standard rate increases of nearly 6% and recoveries on work billed in 2021.

But this was not enough to compensate for the increased expenses. Net income was down more than 9% year over year among the companies surveyed, while partner earnings per share fell 11%.

“Although the numbers are down from last year, all is not bleak for the legal industry,” Mendola said. “2022 will end up being a decent year, but it could be down from 2021 – which was an all-time high.”

Read more:

New law firm financial data signals trouble may be on the horizon

Law firm profits down after record year

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Karen Sloane

Thomson Reuters

Karen Sloan reports on law firms, law schools and legal affairs. Contact her at [email protected]

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