What 2022 Challenges Tell Us About the Rest of 2023

We are more than halfway through the first quarter of 2023, but the outlook — in the legal industry and across the broader economy — is still a bit hard to pin down. One way to try to understand what law firms may face in the remainder of the year is to glance back at 2022. Legal industry reports analyzing law firm performance last year can shed light on trends, but firm leaders should bear in mind that the past several years have been highly unusual, and a general cool-off doesn’t necessarily signal heartache to come, or at least not for everybody.

Analysis from Wells Fargo’s Legal Specialty Group showed a 1.9% drop in demand in 2022 — calculated by the numbers of hours lawyers bill. The drop was even more pronounced for the top 50 highest-grossing firms, which experienced a 2.9% drop. A report from Thomson Reuters’ Institute and the Center of Ethics and the Legal Profession at Georgetown Law echoes these drops in demand and profits, and documents an increase in expenses.

How did we get here?

Coming out of the pandemic, many firms hired lawyers in 2021 and early 2022 to keep up with “a record-breaking amount of M&A work.” But as the M&A market cooled throughout 2022, lawyers logged fewer billable hours than in 2021.

Wells Fargo noted the drop in productivity — 1,568 hours per lawyer, 102 fewer hours than in 2021 — is unprecedented. It has led to layoffs across the industry and surprise among some analysts that more firms aren’t trimming lawyers and staff. Others predict more layoffs as the year progresses.

Also dropping, according to the Wells Fargo report, was net income. It fell by 3.1% in 2022, while profits per equity partner (PPP) dropped by 3.9%.

But let’s not forget 2021.

Remember that the drops in 2022 may stem from a correction following the boom in 2021, amid record-high profits and robust demand. Most people raking in the profits that year knew the pace (not to mention the evaporation of expenses during the pandemic) could not be sustained, and they were correct. And while PPP dropped in 2022, the Wells Fargo report found that overall revenue grew by 3%.

So who may do well in 2023?

The largest firms that over-hired in 2021 and 2022 are shedding staff (Goodwin Procter recently laid off 5% of its associates, paralegals and other professionals), but firms that took a more measured approach to personnel may not need to make many changes or deal with the upheaval — internally and in client relationships — that comes with layoffs. These right-sized firms tend to be in the second hundred nationally, and offer a diverse array of practice areas that help them weather downturns in specific industries.

The real winners? Midsize firms. They saw a smaller decline in demand than larger firms, and midsize firms were the only market segment that experienced a demand increase in non-transactional practices — possibly a sign that clients are shopping for lower-price options.

Is your firm well positioned to seize the opportunity this presents? A lot depends on how you tell your story to potential clients. Give us a call — we can help!