Published on ThomsonReuters.com
The midsize law firm segment in the United States has found itself the focus of renewed and growing interest among many legal market observers in the first half of 2022. Looking as far back as 2015, the midsize segment led the legal market in demand growth, besting both the Am Law 100 and the Am Law Second Hundred in that metric, which measures growth in total billable hours at a given firm.
The global changes experienced in 2016 saw many clients turn to the perceived safe harbor of larger firms — a trend that has held up for quite some time. Then, the global pandemic-related events of 2020 only sharpened the perception that clients needed safety and solidity, and that those would be found among larger firms.
Then came 2022 — global fears of recession, rising inflation, and clients rapidly seeking more cost-effective solutions to their legal questions without sacrificing quality. Law firms, too, have experienced these changes, and with them has come a sort of reversal of fortunes for many midsize law firms.
To be sure, the midsize law firm segment has not been immune to the volatility experienced broadly in the past several years. But the average midsize law firm seems to have staked a position going into the latter half of 2022 that finds them in a better position relative to the market.
Much like their position at the end of 2015, in which the average midsize law firm outperformed its Am Law 100 counterparts in terms of demand growth, the same is true through the mid-point of 2022. And while other trends such as dramatically increasing overhead expenses and associate compensation are placing a drag on the financial results for midsize law firms, many other fundamental markers are looking quite positive.
The latest edition of the Report on the State of the Midsize Legal Market, published by the Thomson Reuters Institute, offers an in-depth exploration of a number of factors contributing to a generally bullish picture for midsize law firms. It is also worth noting, however, that numerous challenges remain.
For example, midsize law firms have generally fared well in terms of attorney attrition. In fact, research from the Thomson Reuters Institute indicates that midsize law firms make up a disproportionate percentage of what has been dubbed “Stay” law firms, those firms with lower rates of attorney turnover that may be indicative of those firms being a desirable place for attorneys to work. For obvious reasons, this is a positive finding, particularly in light of the fact that midsize law firms tend to have lower associate compensation scales and generally offer smaller raises. The clear implication is that for at least some lawyers, a good working environment is about more than just money.
However, the competition for associate talent has unquestionably impacted the ability of midsize law firms to recruit and retain talent. Sparked by large salary increases by major international law firms, midsize law firms have similarly found themselves needing to raise salaries in order to stay competitive. The Thomson Reuters Institute’s 2022 Report on the State of the Legal Market, published in January, discussed the research of Frederick Herzberg, who in the 1950s posited that paying employees less than what they think they’re worth creates dissatisfaction, but paying them what they think they are worth is not sufficient to make them satisfied employees — a sort of “necessary versus sufficient” line of argument.
In this way, midsize law firms with lower pay scales must be careful to create firm cultures that provide satisfaction in ways other than cash compensation. There may be a plethora of necessary conditions to create a favorable working culture, which if present, can possibly overcome the allure of a higher salary. Absent these necessary conditions, however, it becomes increasingly likely that a higher salary will be sufficient to draw lawyers away. And particularly in today’s marketplace, every vacancy which must be filled represents a substantially more expensive endeavor than in years past.
Yet, even in the face of some factors which will give wise law firm leaders pause, midsize law firms are on a generally favorable footing upon which to continue their venture into whatever the future may bring.