Law firms Cooley LLP Follow

(Reuters) - U.S. law firms are struggling to balance swollen attorney ranks after a hiring surge last year with shrinking demand from clients, according to a new report from Wells Fargo's Legal Specialty Group.

Some firms have told the bank they are using internal performance reviews to push lawyers out as a way to manage overcapacity, Wells Fargo said Tuesday.

"They’re looking at their budgets for next year," said Owen Burman, a senior consultant in the Wells Fargo unit. "They want to be in the right position for next year."

Lawyer headcount was up 4.8% during the first nine months of 2022 compared to the same period last year, the bank found.

But demand — calculated as the number of billable hours lawyers logged — dropped by 0.8% for the first nine months of 2022, Wells Fargo found. During the same period last year, demand surged to 6.7%, the bank said.

M&A activity reached a record $5.9 trillion last year, helping to drive a push by many large law firms to hire more lawyers. But rising interest rates and ongoing geopolitical tensions have caused global M&A work to tumble in 2022.

The combined value of global announced M&A deals through the first nine months of 2022 reached $2.81 trillion, down from more than $4.2 trillion for the same period last year, according to Refinitiv.

Wells Fargo said net income for the law firms it surveyed dropped by 7.3% during the first three quarters of 2022 compared to last year.

Profits per equity partner also dropped by 8.5% during the same time period, in part due to a 1.4% increase in the number of equity partners, Wells Fargo said.

Still, Burman said the U.S. legal industry is "not falling off a cliff by any stretch." Nor have law firms begun to lay off significant swaths of their workforce like they did during the Great Recession.

"It’s a very healthy industry that got a little overheated last year. We’re dialing down the heat," Burman said.

He said some law firm have reported to Wells Fargo that they have begun to counsel people out using performance reviews, but the bank's recent survey did not quantify the trend.

A spokesperson for Cooley, a major Silicon Valley-founded law firm, confirmed to Reuters Tuesday that it had conducted an unspecified number of "attorney separations" as a result of annual mid-year associate performance reviews the firm held over the summer.

Wells Fargo's findings come a week after the Thomson Reuters Law Firm Financial Index also found a drop in law firm profitability. Profits-per-lawyer fell nearly 3%, marking the third-straight quarter of decline, according to the Thomson Reuters Institute, which is part of the same parent company as Reuters News Agency.

Read more:

Law firm profit slowdown continued in Q3, but midsized firms saw growth

As M&A deals wane, law firms compete for shares of shrinking pie

Skadden, Goodwin led M&A pack in Q1 as dealmaking cooled

Additional reporting by Sara Merken

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