A high bar set by the law firm industry’s extraordinary performance in 2021 together with several current external macro factors have made the first half of 2022 challenging for law firms. An ongoing pandemic, the war in Ukraine, rolling lockdowns in China, inflation and equity and bond market volatility have all contributed to declining demand. This drop in demand and a longer collection cycle have in turn led to slower revenue growth. And with higher lawyer head count and a return to the office, expense growth has accelerated, outpacing revenue growth and causing margin pressure.
Looking ahead, we anticipate that expense growth will moderate. How much revenue growth accelerates and whether it is enough to reverse midyear margin pressure will rest largely on the practice mix of firms, the timing of a pick-up in transactional demand, and how much firms are able to collect by year end. For many firms, it is likely that profitability will decline from the exceptional levels seen in 2021.