Photo: Shutterstock

Bigger is better is a tired phrase, but it remains a truism in today's legal market.

Overall, demand for law firm hours in the first quarter of 2018 fell by 0.5 percent, the most since 2013, according to data from Thomson Reuters Corp. But the nation's 100 largest firms saw demand rise, by 0.4 percent, marking the fourth time in the last five quarters that the Am Law 100 was the lone segment of the market to see rising demand.

Separate data released Monday by Citi Private Bank's Law Firm Group also found that demand grew only for the top segment of the law firm market.

See also: The Legal Market Is Looking Up, Citi Q1 Survey Shows

While the Thomson Reuters data show a relatively strong performance among large firms, the drop in demand was nevertheless somewhat of a surprise as it came directly on the heels of one of the strongest quarters for law firm financials since the credit crisis. The first quarter is also historically one of the stronger periods of growth for law firms.

The weak demand performance helped pull down a composite score that Thomson Reuters tracks of law firm health by eight points, to settle at 52. Its rise to 60 in the fourth quarter of 2017 represented a high-water mark that had not been reached since 2011. That metric, called the Peer Monitor Index, tracks relative changes of demand, productivity, rates, direct expenses and overhead expenses.

To be sure, the largest firms are not experiencing the same melancholy market as midsize firms. Demand at Am Law Second Hundred firms declined 0.3 percent and midsize firms saw demand down 1.2 percent, according to the Peer Monitor data. In the first quarter, rates grew 3.3 percent across the cohort of firms tracked by Thomson Reuters, which represented stronger growth than the first quarter for the past two years.

That growth, too, was primarily fueled by the country's largest firms. Rates at Am Law 1 to 50 firms jumped 6.3 percent, which the survey called “remarkable.” Across the Am Law 100, rates were up 4.5 percent from the prior-year period.

“The Am Law 100 continues to separate itself from the pack,” said Michael Abbott, vice president for client management and thought leadership at Thomson Reuters. “And you are seeing some struggles in the Second Hundred, and particularly the second half of the Second Hundred and midsize firms, which is having an impact on the overall peer monitor numbers.”

➤➤ Want more reporting on the evolving legal industry? Sign up here for The Law Firm Disrupted, offering an in-depth, levelheaded discussion of trends rocking the legal sector.

The Am Law 50 may have felt comfortable pushing rate increases in the first quarter after seeing a spike in demand and rates in the fourth quarter of last year, said Justin Hines, a senior analyst at Thomson Reuters. Those firms working on major matters still have the ability to set their prices, even as many analysts of the legal market describe a buyer's market for commoditized work.

“There is the potential that the fourth quarter gave them confidence to push that rate. It's certainly not something we've seen,” Hines said of rate growth as high as 6.3 percent. “If that continues to be the trend, it will be an interesting story throughout 2018.”

As rates increase, realization will be a figure to watch. In the first quarter, it remained fairly steady at 88.1 percent. But realization in this quarter does not necessarily correlate to the high billing rate growth seen over the same timeframe. If that number falls in the second period, it could represent pushback by clients.

“If we continue to see that aggressive rate growth, hopefully realization will keep pace, but we may see that start to [drop off] in the second or third quarter as the bills actually get paid,” said William Josten, senior legal industry analyst at the Thomson Reuters Legal Executive Institute.

One area in which Am Law 100 firms underperformed other segments was demand for litigation services. Overall, litigation hours dropped 0.9 percent. Second Hundred firms saw demand rise 1.3 percent, however, as their larger competitors saw a decline of 1.7 percent. It was the second straight quarter where litigation demand for the Am Law 100 has lagged behind that of its mostly smaller competitors.

Read More:

Despite Anxiety-Inducing Trends, Am Law 100 Rose to the Challenge in 2017