U.S. Legal Industry Adopts Prudent Hiring Strategy for First-Year Associates in 2023

As law firms in the United States grapple with the ongoing challenge of escalating direct expenses over the past three years, they have taken a cautious approach to hiring first-year associates this autumn. This deliberate decision has been illuminated by the findings of the Thomson Reuters Institute's latest Law Firm Financial Index, raising essential questions about the outlook for profitability in the legal sector in the coming year.
 

Profits and the Prestigious Am Law 100
 
The recently published report underscores that the 100 most profitable law firms in the United States, collectively known as the Am Law 100, are on track to conclude the year with increased profits. However, the outlook for midsize law firms and Am Law 200 firms appears to diverge, with midsize firms expected to maintain profits at levels akin to 2022, while the latter could face a decline in earnings compared to the preceding year.
 
Diminished First-Year Associate Recruitment
 
Data extracted from the Thomson Reuters Institute's index reveals a substantial reduction in the hiring of first-year associates, particularly among Am Law 100 firms. During September, the average number of new first-year associates recruited by these top-tier firms plummeted by nearly 17% compared to the previous years. The Am Law 200 firms experienced an even more substantial decrease, with a 25% reduction in first-year class sizes. Meanwhile, midsize firms opted to hire 9% fewer first-year associates during the same period.
 
The Impact on Expenses
 
The overall decline in new associate recruitment has not fully counterbalanced the expansion of headcount observed in midsize and Am Law 200 firms. Consequently, direct expenses for large and midsize U.S.-based law firms surged by more than 6% in the third quarter of 2023. While Am Law 100 firms saw a 1% reduction in overall associate headcount compared to the previous year, the numbers increased by 4% and 8% at Am Law 200 and midsize firms, respectively.
 
Prospects for 2023
 
William Josten, Manager for Enterprise Legal Content at the Thomson Reuters Institute, shares his perspective on the outlook for the legal market in 2023. He anticipates that the year will be satisfactory but not exceptional, with performance varying across different law firms. While some firms are thriving, others are grappling with challenges in the evolving legal landscape.
 
Managing Expenditures
 
Overhead expenses have continued to rise, with a notable 7% increase in the third quarter, marking a trend that commenced at the beginning of 2023. Notably, Am Law 100 firms have demonstrated greater effectiveness in curbing expense growth compared to other segments of the legal market.
 
Practice-Specific Demand
 
The demand for legal services remained relatively stable during the third quarter, although significant variations were observed across practice areas. Demand for bankruptcy lawyers surged by 6% compared to the previous year, and litigation demand increased by 2%. Conversely, demand for corporate work experienced a decline of nearly 2%, while M&A demand dropped by over 5% in the third quarter, as per the index's findings.
 
In summary, U.S. law firms have adopted a cautious approach to first-year associate hiring in 2023, aiming to enhance profitability and manage rising expenses. The outlook for the year varies among firms, with some poised for growth and others encountering challenges in a dynamic legal market. Additionally, the demand for legal services fluctuates by practice area, reflecting the evolving needs of clients.