PEER MONITOR INDEX
PMI Holds Steady in Fourth Quarter
Expense Cuts Help Offset First Annual
Drop in Demand Since 2013
The fourth quarter was a classic good news/bad news scenario: After
three quarters of steadily increasing expenses, large law firms applied
the brakes in the fourth quarter and reined in costs. And just in time.
Demand slumped in the fourth quarter and rates pulled back slightly.
Demand declined steadily throughout 2016, turning negative at midyear. In the fourth quarter, demand fell 1.4% – its third consecutive
quarterly decline and the biggest drop since Q1 2013. That proved
enough to pull full-year demand down 0.6% – the first annual decline
in three years. It also marked the first year since 2010 to have three
consecutive down quarters.
LEGAL EXECUTIVE INSTITUTE
Q4 | 2016 EXECUTIVE REPORT – ISSUED 2.13.17
PEER MONITOR ECONOMIC INDEX (PMI)
Q4 PMI Score: 48
Q4 PMI
PMI Score:
Score: 48
48
Q4
75
75
75
Credit Crisis
70
Credit Crisis
Crisis
70
Credit
70
65
65
65
60
60
60
55
55
55
50
50
50
45
45
45
40
40
40
35
35
35
Quarter 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4
Quarter 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4
Quarter 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4
2006
2006
2006
2007
2007
2007
2008
2008
2008
2009
2009
2009
2010
2010
2010
2011
2011
2011
2012
2012
2012
2013
2013
2013
2014
2014
2014
2015
2015
2015
2016
2016
2016
The PMI represents the relative rate of change among the major factors influencing law firm
performance. These factors are tracked individually in the graph below.
Rate growth pulled back slightly from a two-year high in the third
quarter to 2.9% in the fourth quarter.
Productivity continued to drop, owing to falling demand and rising
headcount growth.
But the drop in expenses helped hold the Thomson Reuters Peer
Monitor® Economic Index (PMI)1 at 48 for a second straight quarter.
DEMAND BY PRACTICE AREAS
Transactional practices were mixed.
Corporate work has been up for a remarkable 12 consecutive quarters,
but just barely kept the streak alive in Q4, rising 0.2%. For the year,
corporate was up 0.4%. Corporate work has largely been bolstered
by M&A work, especially among Am Law 1-50 firms. M&A has also
been positive for Am Law 51-100 and Second Hundred firms, although
it makes up a smaller percentage of their work, and the overall
corporate work has been down.
Real estate and Tax work both fell 2.1%, and were down 1.2% and
2.0% for the year, respectively.
Litigation was down 2.7% – its weakest performance since Q1 2013.
For 2016 as a whole, litigation dropped 1.7% – the biggest demand
drop in the last three years. Patent litigation fell 1.5% and finished
the year down 2.5%.
Patent prosecution, which had been up all year, inched down 0.1%,
but was up 0.7% for the year.
Labor and employment was down 2.6% for the quarter and down
1.3% for the year. Bankruptcy fell 6.4%, ending the year down 3.5%.
PERFORMANCE BY MARKET SEGMENT
Amidst struggles in some of the other segments, Am Law 100 firms
managed a respectable quarter and year. Demand was up 0.1% in Q4
– the only market segment to show an increase. However for the year,
demand slipped 0.3%. After three consecutive quarters of worked rate
growth of 3.3% or higher, rates rose 3.0% in Q4, leaving the 2016 rate
growth at 3.3%. This was the strongest of any market segment and a
marked improvement from the 2.7% rate growth in 2015.
1
he PMI is a composite index score, representing the quarter-over-quarter change in drivers
T
of law firm profitability, including rates, demand, productivity and expenses. Positive
factors driving firm profitability will produce a higher score. A score exceeding 65 generally
indicates a healthy operating environment.
PMI KEY FACTORS
Q4 ‘16 Q4 ‘15 Q4 ‘14
Q4 ‘16
‘16 Q4
Q4 ‘15
‘15 Q4
Q4 ‘14
‘14
Q4
Demand -1.4% 0.0% 0.1%
Demand -1.4%
-1.4% 0.0%
0.0% 0.1%
0.1%
Demand
Productivity -2.8% -1.2% -1.2%
Productivity -2.8%
-2.8% -1.2%
-1.2% -1.2%
-1.2%
Productivity
Rates 2.9% 2.4% 2.9%
Rates 2.9%
2.9% 2.4%
2.4% 2.9%
2.9%
Rates
Direct Expenses 2.9% 1.8% 3.3%
Direct Expenses
Expenses 2.9%
2.9% 1.8%
1.8% 3.3%
3.3%
Direct
Overhead Expenses 2.8% 2.7% 2.7%
Overhead Expenses
Expenses 2.8%
2.8% 2.7%
2.7% 2.7%
2.7%
Overhead
-4
-4
Current Reading (Q4 2016) -4
CurrentReading
Reading (Q4 2016)
Current
3-Year Range (Q4 2016)
-2
-2
-2
3-Year Range
3-Year Range
0
0
2
2
4
44
0 from Q422015
Change
Changefrom
fromQ4
Q42015
2015
Change
Up
Flat
Down
Up
Flat
Down
Up
Flat
Down
DEMAND GROWTH BY PRACTICE
2%
2%
2%
Y/Y % Change
Y/Y %
% Change
Change
Y/Y
0%
0%
0%
-2%
-2%
-2%
-4%
-4%
-4%
-6%
-6%
-6%
-8%
-8%
-8%
Corporate
Patent
Patent
Corporate
Patent Litigation
Patent
(all)
Prosecution
Corporate
Patent
Patent
(all)
Prosecution Litigation
Litigation
(all)
Prosecution
Proportion 23%
Proportion 23%
23%
Proportion
4%
4%
4%
5%
5%
5%
Tax
Tax
Tax
3%
3%
3%
Real
Labor/
Litigation Bankruptcy
Real Employment
Labor/
Litigation Bankruptcy
Bankruptcy
Estate
Real
Labor/
Litigation
Estate Employment
Employment
Estate
6%
6%
6%
Q4 ‘16 v Q4 ’15
Q4 ‘16
‘16 vv Q4
Q4 ’15
’15
Q4
10%
10%
10%
31%
31%
31%
2%
2%
2%
PEER MONITOR INDEX
Midsize, despite a 1.6% drop in demand in Q4, managed a 0.1% gain
in demand for the year – the only market segment to show positive
growth. Relatively strong rate growth of 2.6% in Q4 helped raise rates
2.3% for the year, a slight improvement from the 2.2% growth in 2015.
Am Law Second Hundred significantly trailed the other segments in
growth, falling 3.0% in Q4 and 1.7% for the year. Worked rate growth
of 2.9% for the quarter resulted in 3.1% rate growth for the year – the
only market segment not showing higher rate growth in 2016.
RATES
After working their way higher in Q2 and Q3, worked rate growth was
2.9% for the quarter and year – the latter was an improvement from
the 2.7% rate growth seen in 2015.
ISSUED 2.13.17
Headcount rose 1.6% in both the quarter and year – the latter
representing the biggest annual jump in headcount since 2012.
It’s notable that alone among the segments, Am Law Second
Hundred firms did a remarkable job of slowing their headcount
growth, even shrinking it -0.2% in the fourth quarter. For the year,
it was up only 0.5% – a dramatic deceleration from 1.3% in 2015,
and much lower than the other segments. But despite the effort,
Am Law Second Hundred still finished only middle-of-the-pack in
productivity because of declines in demand.
The attorney replenishment ratio4 pulled back slightly to 1.21 –
although that is still near the highest end of the range seen over
the last three years.
Standard rates, meanwhile, were up 3.0%.
After a jump in Q3, collected realizations fell back to 82.5% – a mere
one-tenth of a percentage point from its all-time low.
Cash collections were up only 0.9% during the quarter.
EXPENSES2
Expenses took an abrupt turn. After rising for three consecutive
quarters to levels not seen for several years, firms sharply curtailed
their expense growth in the fourth quarter.
Direct expenses rose only 2.9% – the slowest growth since Q1.
After setting an eight-year high last quarter, indirect expense growth
dropped to 2.8% – the lowest mark of the year. While firms continued
to spend in areas such as technology, recruiting, as well as marketing
and business development, they have slowed spending growth in
areas such as office expenses, libraries and outside services.
PRODUCTIVITY3
Productivity slumped 2.8% in the quarter – tying the worst mark of
the year. For the full year, productivity fell 2.3% – the biggest drop
since the depths of the 2008-09 recession.
Firms were squeezed by a perfect storm of slumping demand and
rising headcount.
2
3
4
I ncludes both direct expenses (salaries, fringe benefits and professional fees associated
with billable timekeepers) and overhead expenses (all other nondirect expenses, including
staff compensation, marketing, technology, occupancy, office expenses and research).
Productivity is defined as hours per attorney and represents the ratio of capacity to market
demand.
Attorney replenishment is the ratio of new attorneys to the firm divided by those departing.
A result greater than 1 indicates growing capacity, while a result less than 1 signals a
contraction.
For more information on the PMI, and how Peer Monitor can help your
firm successfully manage through today’s economy, please contact
Brent Turner at 651-848-8712 or [email protected],
or visit peermonitor.thomsonreuters.com.
© 2017 Thomson Reuters S043942/2-17
SPECIAL FOCUS
2016: YEAR OF TRENDS
2016 was marked by several distinct trends, some positive,
some more worrisome.
In the former category, rates were generally stronger. After
falling for most of the previous three years, rates rebounded
slightly in 2016. While it has not yet made up for the declines,
the return of any measure of pricing power is unquestionably
a positive.
But while rates were inching upwards, demand spent most of
2016 slipping. After a relatively strong first quarter, demand
eroded throughout the remainder of the year, falling for the
first time since 2013.
Even as demand was slipping, firms generally accelerated
their hiring, adding to headcount and direct expenses.
The combination resulted in a sharp drop in productivity,
something the market has been struggling with for the past
several years.
Aside from slightly healthier rates, many of the key indicators
are trending in directions that will mean further challenges for
law firm profitability if they should continue into 2017.