- Average profits-per-equity-partner grew 5.8% in 2020, double the pace of 2019.
- Lower rate increases (but still increases!) created potentially favorable pricing vs. larger firms
- Demand finished 2020 on an upward trend, leading to a strong start for 2021
Midsize law firms proved surprisingly resilient through the turmoil of 2020, and according to the 2021 Report on the State of the Midsize Legal Market, issued today by the Thomson Reuters Institute, these firms may possess unique and significant advantages, compared with their larger competitors, as the legal market emerges from the effects of the pandemic.
Demand for midsize law firm services was down compared with the previous year, but 2020 ended with an upward trend that has carried over into early 2021. Strong rate growth in 2020, along with reductions in costs such as office expenses, helped offset weakness in demand, and midsize firms showed solid profitability growth, with average profits-per-equity partner growing by 5.8% – nearly double the pace of the previous year.
Midsize firms made major operational changes that could improve their competitive standing. Firms slashed overhead expenses by nearly 7% in the fourth quarter, giving them an improved cost structure. In addition, while larger firms increased rates at a record pace, midsize firms were more restrained with their rate increases in 2020. Midsize worked rates went up by an average of 3.9%, compared with 6.1% for Am Law 100 firms. This could help strengthen midsize firms’ positioning with clients as having a more favorable cost-value proposition. And as law firm clients begin to plan for their own budget pressures when they emerge from the pandemic, they are likely to place even greater emphasis on cost and efficiency.
The report notes that midsize firms are more likely to be recognized by clients for their value and pricing than larger firms. Larger firms often carry greater brand recognition in corporate boardrooms, but that greater recognition is not necessarily an advantage when it comes to converting that awareness into winning the work.
“Midsize firms have shown remarkable strength and resilience over the past year,” said Mike Abbott, vice president, Market Insights and Thought Leadership, Thomson Reuters. “The midsize market covers a wide variety of firms, including large regional firms, specialized boutiques, firms with multinational footprints, and more. But what they share is the ability to provide their clients with value, flexibility and agility in legal services. And those attributes can be a powerful advantage in a recovering market that is highly competitive for legal work.”
The 2021 Report on the State of the Midsize Legal Market can be downloaded at https://legal.thomsonreuters.com/en/insights/reports/2021-state-of-the-midsize-legal-market-report.