Welcome to The Edge, our new weekly newsletter for the leaders, partners, and marketing and business development teams at midsize law firms.

Last week, we attempted to clarify the often elusive definition of “midsize firm.” This time, we look at data collected so far in 2024 and attempt to assess the health of the midsize firm market.

Midsize firm finances appear to be heading in the right direction. First-quarter numbers showed demand is up and rates are rising. While deal volume is down, counter-cyclical practices are continuing to shine, especially bankruptcy and litigation. Expenses are increasing but not as much as in the post-pandemic period. Other indicators like office leases, law firm mergers, and lateral hiring also suggest that firms are optimistic about their prospects.

WHAT THE NUMBERS SHOW

The legal industry saw revenue growth of just under 11 percent in the first quarter of 2024, Citi's Q1 Flash Survey Report found. “Revenue growth was driven by a rebound in demand, an increase in the dollar value of hours logged, and collection of 2023 year-end inventory,” Citi said.

Demand at midsize firms grew by 2.1 percent, according to the latest quarterly analysis by Thomson Reuters, a figure that outpaced Am Law 100 firms. Litigation and bankruptcy practices experienced the highest demand growth during Q1, while demand for transactional work declined.

Rate growth has been strong, as well — particularly among midsize law firms. Thomson Reuters Law Firm Financial Index noted that midsize firms raised their rates at a faster clip than the Am Law Second Hundred during the first quarter and that real rate growth is matching its highest levels since the financial crisis of 2007-2008. At the same time, midsize firms also saw healthy growth in work rates, which were up 5.7 percent.

Firms are also controlling expenses. On a per-lawyer basis, direct expenses such as salaries and office costs were up just 2.3 percent in the first quarter, according to Thomson Reuters’ numbers. This is in line with 2023’s 2.5 percent growth and far lower than 2022’s 8 percent growth rate. 

LITIGATION, BANKRUPTCY AND M&A 

Midsize firms’ litigation practices saw strong growth in the first quarter, with Thomson Reuters noting that the increase in demand had reached its highest levels “since the post-pandemic snap back in 2021.” Firms notched 4.7 percent growth in demand for litigation services in Q1. 

Litigation growth is expected to continue for the time being. Norton Rose Fulbright’s 2024 Annual Litigation Survey reported that nearly nine out of 10 general counsel and in-house litigation leaders said they expected the volume of lawsuits they faced to stay the same or increase this year.

Demand for bankruptcy practices at midsize firms jumped 3 percent, Thomson Reuters said in its Q1 review. Recently released numbers from the U.S. courts show that for the 12 months ending March 31, business bankruptcy filings increased 40 percent over the previous year. According to Epiq Bankruptcy, bankruptcy filings continued to rise in the first quarter, with commercial Chapter 11 cases up 43 percent. As of March, commercial and individual bankruptcy filings had increased for 20 consecutive months, Epiq said. 

On the transactional side, M&A activity in North America during the first quarter declined 8.2 percent from the previous quarter, and global deal volume hit a nine-year low. While the value of transactions rose due largely to a series of megamergers, middle-market deals declined in volume and value. News reports quoting data from LSEG showed 175 middle market deals worth $49.9 billion in Q1, down from 219 and $62.8 billion in the first quarter of 2023.

OTHER KEY INDICATORS

Here are a few other indicators from the first several months of the year:

• An analysis by the consulting firm Fairfax & Associates shows that across the industry, 20 law firm mergers were completed in the first quarter of 2024. This represents a 25 percent jump over the same period in 2023. Many of the mergers involved midsize firms.

• Law firms have been in a leasing mood. Midsize and large firms participated in 1.7 million square feet of transactions during the first quarter of 2024, up nearly 48 percent compared to Q1 2023, according to the U.S. arm of Savills.

• In a report released in March, legal analytics provider Decipher projected an 8 percent decline in lateral partner hiring for the year, and a 12 percent drop in lateral associate hires. Lateral partner moves across midsize and large firms decreased in 2023 by 26 percent, Decipher said. Associate moves saw an even larger drop—35 percent during the same period.

FINAL THOUGHTS

Although the outlook for midsize firms has been relatively positive this year, complacency would be a mistake. Ongoing uncertainties in the global markets and geopolitics could affect demand. Interest rates and inflation might continue to depress deal volume. And facing their own financial pressures, large firms could step up competition. Despite these dangers, midsize law firms are well-positioned to thrive—especially if they continue to strategically manage their risks.

Do you have questions, feedback, or topics you would like us to cover? Send a note to david@good2bsocial.com.