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The market for Big Law keeps getting stronger, but that doesn't mean it's more profitable.

According to a Thomson Reuters Peer Monitor Economic Index (PMI) report released Monday, demand for large law firm legal services in the first three quarters of the year was at its highest level since the recession and billable rates continue to rise. On the flip side, costs were up and overall productivity was down in the same period. 

The report, which is a composite index derived from data collected from 160 major law firms in the U.S. and some international markets, gave the legal industry a score of 56, up three points from the previous quarter's rating. A rating of 65, according to the report, indicates "strong" firm market performance.

According to the report, demand for large law firm services rose 2.4% in the third quarter, putting demand 1% higher in 2019 compared with the first nine months of 2018. 

"The large law firm market is seeing a second straight year of strong growth in both demand and rates," Mike Abbott, vice president of enterprise thought leadership and content strategy at Thomson Reuters, said in a statement. "The growth is fairly widespread across market segments, practice areas and geographies."

Broken up by segment, Am Law 50 firms saw a 2.3% demand growth in the third quarter, while firms in the bottom half of the Am Law 100 saw the largest growth, up 3%. Am Law Second Hundred firms were just behind at 2.6%.

Litigation had strong practice area demand growth at 2.1%, which was the highest growth it had seen during the third quarter in the last eight years, according to the report. Much of that growth was at Second Hundred firms, Thomson Reuters said, contributing to the productivity increase for that group. 

Growth in litigation is an important "harbinger of things to come" when looking at overall industry growth, according to Joe Blackwood, a thought leadership analyst at Thomson Reuters with a focus on the legal market, and Bill Josten, strategic content manager for legal content at Thomson Reuters. Increased litigation work over seven of the previous eight quarters is noteworthy because growth in this practice area was previously stagnant since 2012, Josten said.

Most practice areas saw some level of demand growth in the third quarter. For instance, overall corporate work was up 4%, an increase of 1.6% year-to-date, according to Thomson Reuters. Real estate gained 3.5% in the third quarter, labor and employment was up 4.7% and bankruptcy saw a 3.2% increase—meaning there has been demand growth in all three practice areas year to date in 2019 compared with 2018. 

Rising Expenses, Productivity Declines

Expenses are on the rise and threaten to erode some of the profitability fostered by increased demand. Expenses were up, from 3.4% in the second quarter, to 4.1% in the third quarter, which the report said is the highest expense growth level in three years.

"As macroeconomic uncertainties continue, it's important that firms remain vigilant about containing costs and hiring levels," Abbott said in a release.

A larger spend on recruiting and investment in technology were the two primary drivers of the increased overhead, according to Thomson Reuters officials.

Helping to mitigate expense costs were rising billing rates, which the market saw in the third quarter. Overall rates were up 3.7% in the third quarter, consistent with the 3.8% increase through 2019 thus far.

Meanwhile, law firm demand hasn't kept up with hiring, resulting in a small drop in overall productivity.

Broken into segments, Am Law 50 firms increased hiring 2.9% in the third quarter, but demand did not match the hiring rate and productivity slipped 2.2%.

"Firms try to hire several quarters or even years in advance of what demand might be," Josten said. "Many firms are trying to increase their leverage model and hire more associates to push work down to."

Blackwood said that the uptick in hiring is a trend since 2012 and is occurring mostly in the fifth- to eighth-year associate ranks. These associates churn out a lot of work and they are paid less than partners, usually making them very profitable for the firm, he noted.

In collections, firms saw a collected realization against worked rates of 89.6%, about the same as last year.  

Cash collections were up 6.7%, which was a slight improvement over the 6% seen a year earlier. 

Overall, Blackwood and Josten said the macro market was "strong" and that firms are in a position to make strategic investments. They said many firms are using this period to prepare for the looming economic downturn that is "historically, long overdue."

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