While the final quarter is still on the horizon and economic uncertainty is lingering, law firm performance for 2022 is significantly “baked in” at this point, and it would take a major shake-up to alter course, some industry observers say.
In contrast, law firm leaders and analysts who’ve begun charting a path for 2023 say next year is a big question mark, with uncertainty about whether the deal market will rebound and unknowns such as the U.S. midterm elections and the war in Ukraine, along with stubbornly-persistent inflation that could shape the road ahead.
Demand and profits are down this year, but that was expected. Even before much of the geopolitical and macroeconomic turmoil kicked in, law firms knew their 2021 benchmarks were going to be tough to top.
And a majority of firms still reported better-than-anticipated performance and profitability after the start of the year, according to a recent ALM/LawVision Flash Survey. In the context of the past three years, too, the industry has seen 2.3% average annual demand growth since halfway through 2019, according to Citi Private Bank Law Firm Group.
“Generally firms have been concerned, but up until the half-year point, things seemed to be holding up quite well,” said Tony Williams, a London-based principal at Jomati Consultants.
Williams said, for firms with a December year-end, financial performance is already “significantly baked in,” and that “things would have to come off quite dramatically in the last three to four months to have a significant impact” on those 2022 financial results, which multiple firms have described as decent, pretty good or, in some cases, even great.
But things get significantly blurrier when trying to project out through next year.
David Foltyn, CEO of Honigman, said the lingering question for his firm on this year’s performance is whether it will be more like 2019, 2020 or 2021—all of which included gains.
However, “the whole law world is wondering about 2023,” he said.
Gerald Greenspoon, co-managing director of Greenspoon Marder, similarly said he’s optimistic about his firm’s position this year, which he called likely “our strongest year ever” and confident of a repeat in 2023.
But he said chief among his concerns going forward is rising interest rates, which affect corporate borrowing, real estate development and, perhaps most critically, consumer confidence.
“We all fear uncertainty, and there’s definitely uncertainty looking ahead. There’s a lot of headwinds on the horizon, there’s no question about that,” Greenspoon said.
While the U.S. Federal Reserve appears committed to cooling the economy through rate hikes, they could also lead to a broader economic slowdown if buying scales back too much.
“We remain very optimistic on our growth for 2023, absent a major economic decline—which of course is possible,” Greenspoon added.
For Ropes & Gray, the question for the rest of the year and into 2023 is whether the deal market will rebound. Right now, “it depends on who you ask,” said Julie Jones, the chair of the firm.
She said some of the firm’s private equity clients are saying there’s going to be a rush to deploy capital in the fourth quarter of this year, with some investors speculating that’s when prices will reach their lowest point before beginning to increase again.
“I think we’re sensing some cautious optimism about that,” she said. “But that would be the question: Does it continue into 2023?”
Williams, of Jomati Consultants, said interest rates are one of the big mysteries of next year, and that changing political leadership—whether it’s a new prime minister in the U.K. or the upcoming midterms in the U.S.—is another source of uncertainty. Tensions with China and the war in Ukraine will likely remain top-of-mind, too.
While law firms’ biggest challenge right now might arguably be “right-sizing” their ships after the talent feeding frenzy last year, Jones also said the situation should reach more of an equilibrium next year.
“I think we’re going to have a more stable talent situation. I think it’ll return to firms being opportunistic about where they need to grow and what are the right fits. And I think that would be healthy,” she said. “The biggest question is the deal market.”