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2008 Shaping Up As a Disappointing Year for Law Firms

A few months ago, I posted that even as law firms celebrated record profits for 2007, they needed to brace themselves for an imminent downturn.   And with the first two quarters of law firm financial data for 2008 now available courtesy of Dan DiPietro for The American Lawyer, law firm profitability is officially on the decline.

Bruce MacEwen shares further details on the downward trends in this post.  He describes that:

    * Revenue growth has reversed, with demand the weakest since 2001

    * Since firms have continued to add lawyers, there's "profit margin compression" -- lower revenues hit higher expenses; and

      *The slowdown is hitting the most profitable firms the hardest. In the first half of 2008, demand dropped off even more dramatically and expenses increased at a more rapid pace at the top firms, resulting in even greater margin compression and a steeper drop in productivity than experienced by their less profitable rivals. The practice areas that normally provide a lift in a downturn -- restructuring, bankruptcy and litigation -- have not helped cushion the drop-off in transactional work.

MacEwen also highlights that "global" firms, with more than 25 percent of their lawyers abroad, have experienced the least profit margin compression.  For MacEwen, this isn't surprising:

Those geographies are experiencing a similar, though not as sharp, a slowdown as we here in the US. So their geographic diversity hasn't helped much. By contrast, if you think Citi's definition of "global" firm identifies firms farther down the globalization path, they're likely to have substantial presences in Asia and the MidEast--areas anything but suffering from the Western economies' downturn.

For MacEwen, these recent trends highlight the strategic importance of global diversification as a way to hedge against financial downturns.  Of course, a global strategy is long term.  In the short term, firms need to find ways to cut costs, which isn't an easy task either. 

Posted by Carolyn Elefant on August 22, 2008 at 11:44 AM | Permalink | Comments (0)


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