Law Firms
Industry Profile Report
Dive Deep into the industry with a 25+ page industry report (pdf format) including the following chapters
Industry Overview Current Conditions, Industry Structure, How Firms Operate, Industry Trends, Credit Underwriting & Risks, and Industry Forecast.
Call Preparation Call Prep Questions, Industry Terms, and Weblinks.
Financial Insights Working Capital, Capital Financing, Business Valuation, and Financial Benchmarks.
Industry Profile Excerpts
Industry Overview
The 162,800 law firms in the US provide advocacy and advisory services to businesses, non-profit organizations, individuals, and government agencies. The practice of civil law accounts for 94% of the legal industry’s revenue, while criminal law accounts for only 4%.
Client Cost Cutting
Businesses have cut the budgets of their legal departments, forcing them to reduce spending on outside legal services.
Alternative Fee Arrangements
Driven by client demands for cost containment, firms are offering alternatives to the traditional billable hour model.
Industry size & Structure
The average law firm operates a single location, has 6-7 employees and generates $1.8 million in annual revenue.
- There are about 162,800 law firms in the US with over 1 million employees and generating about $295 billion in annual revenue.
- Another 292,500 lawyers practice solo.
- The industry is highly fragmented with the 20 largest law firms representing less than 10% of revenue.
- The largest US law firms by revenues are Baker McKenzie; Skadden, Arps, Slate, Meagher & Flom; Latham & Watkins; Jones Day; and Kirkland & Ellis.
Industry Forecast
Law Firms Industry Growth
Recent Developments
Mar 23, 2023 - Dealmaking Remains Weak in 2023
- A continued decline in global dealmaking activity could reduce demand for legal services. In January 2023, deal volume declined 27.5% from December and was down 46.7% compared to January 2022, according to GlobalData. Headwinds, including the war in Ukraine, inflation, and global economic uncertainty dampened demand for deals in 2022, and the effects are carrying over into 2023. Dealmaking activity in January declined year over year across all deal types, including private equity (down 54.2%), venture capital (-51.8%), and mergers and acquisitions (-40.9%). In North America, deals were down 48.9% in January 2023 compared to a year earlier and were off 12.3% from December 2022.
- A late-2022 drop in leasing activity in the US legal industry may be a sign that firms are pulling back on expenses in anticipation of an economic slowdown, according to the Savills US Law Firm Activity Report Q4 2022. Leasing volume in the fourth quarter of 2022 was about 1.1 million square feet, which was down about 31% compared to the same period in 2021. While real estate firm Savills noted that one quarter of data isn’t indicative of a trend, real estate could be one among several cost items law firms are attempting to reduce. Among law firms that relocated in 2022, 58% moved into a newer building.
- A study released in mid-March by two legal professors and legal technology firm Casetext reported that GPT-4, the upgraded AI chatbot by OpenAI, can outperform most students who take the bar exam. GPT-4 received a grade of 297, which is in the 90th percentile of students who take the two-day test. The earlier iteration of OpenAI’s large language model chatbot, ChatGPT, could not pass the bar exam, highlighting how much the technology has improved in less than four months. One of the study’s authors said he was surprised by how well GPT-4 performed on the test’s essay and performance test answers. According to Reuters, the National Conference of Bar Examiners, which designs the essay portion of the exam, said that “AI cannot currently match” the skills actual attorneys acquire through education and experience.
- US law firms saw weaker demand at the end of 2022 as productivity dropped and expenses increased, according to the most recent editions of the Thompson Reuters Institute’s Law Firm Financial Index. In the fourth quarter of 2022, lawyers billed an average of 112 hours per month compared to 121 hours per month in Q4 2021. Demand for legal services dropped 3.9% year over year in Q4, productivity fell 7% over the same period, and profits per partner were down 4.5%. All practice areas tracked by the Law Firm Financial Index experienced declines in demand in the fourth quarter, led by mergers and acquisitions work, which declined 17% compared to Q4 2021. Bankruptcy and tax practices each saw declines of 10%.
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