Profit margins are expected to improve as firms benefit from a leaner cost structure.
Los Angeles, CA (PRWEB) November 23, 2012
Until 2007, the Law Firms industry benefited from strong demand for commercial services due to booming investment markets and corporate activity, such as initial public offerings (IPOs) and mergers and acquisitions (M&As). The global recession led to dramatic declines in these activities, however, and a subsequent drop in demand for legal services, weakening the top-tier firms that receive the bulk of their revenue from major corporate clients. Those same firms, however, picked up the majority of countercyclical work, such as bankruptcies, following the recession. As the economy began to improve slowly, the industry also started to benefit from an increase in corporate activity, which is expected to drive revenue growth of 1.9% in 2012. Consequently, revenue is growing 1.0% on average annually to $290.7 billion over the five years to 2012. Nevertheless, countercyclical activity and an increasing number of IPOs have not been enough to right the balance sheets of some industry firms, says IBISWorld industry analyst Anna Son.
As profit margins declined following the recession, firms were quick to cut costs. In some cases, the drive to reduce expenses has led to mass layoffs and salary freezes, especially among associate lawyers. These leaner operations are expected to pay off over 2012, with profit margins forecast to improve slightly. Additionally, a massive swing in the business model for many law firms may bring the perceived value of legal services in line with expected outcomes. Clients are growing weary of paying top dollar, pushing them to look for alternative pricing arrangements. Some firms are trying to accommodate this shift by moving away from traditional hourly rates to performance-based pricing, says Son. The Law Firms industry is highly fragmented, with the majority of operators being small practices or medium-size firms. Only domestically generated revenue contributes to industry market share, so firms that generate the majority of their revenue from abroad, such as Baker & McKenzie, have a lower market share relative to their total revenue. Industry concentration will likely increase over time because of the industry's high level of merger and acquisition activity. Since the mid-1990s, merger activity among firms has heated up, with a number of major firms merging with entities in the United Kingdom and Europe. Merger activity has also correlated with an increase in firm offices opening overseas.
Despite the changing pay structure, industry revenue is projected to grow in the five years to 2017. Overall performance of the economy, investment activity, corporate profit and changes in laws and regulations will heavily influence revenue growth in the next five years. Improving investor confidence, which will stimulate more activity in M&A and IPO markets, will further underpin demand for legal services. Profitability will continue to recover with growing work volume and the cost reductions implemented during the recession. Furthermore, merger activity and international expansion within the industry will escalate, as firms will increasingly look to reduce costs and capitalize on growing markets. For more information, visit IBISWorld’s Law Firms in the US industry report page.
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IBISWorld industry Report Key Topics
This industry comprises offices of legal practitioners, known as lawyers or attorneys, which are primarily engaged in the practice of law. Establishments in the Law Firms industry provide expertise on a range of areas or in specific areas of law, such as criminal, corporate, family and estate, patent, real estate or tax.
Key External Drivers
Industry Life Cycle
Products & Markets
Products & Services
Globalization & Trade
Market Share Concentration
Key Success Factors
Cost Structure Benchmarks
Barriers to Entry
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