Following the unusually strong performance seen in 2021, we entered 2022 expecting comparatively modest growth. 2022 became an increasingly challenging year for the law firm industry from one quarter to the next as a result of a macro environment marked by the Russia-Ukraine war, rolling lockdowns in China, an energy crisis, supply chain issues, rising interest rates, inflation and equity and bond market volatility.
We expect that many firms will see a decline in profitability in 2022, compared to the extraordinary results of 2021. However, looking at average annual profitability growth since 2019, we believe that the law firm industry has performed very well.
Given the high likelihood of a recession in 2023, there are challenges ahead, but clients need lawyers in good times and bad. While it is hard to predict what will happen in 2023, we expect that firms with a tilt toward down cycle practices will fare better than those who are heavily dependent on M&A and capital markets practices.
In a challenging demand environment, firms will likely be dealing with excess capacity. While the level of excess capacity may be painful in the near term, experience has shown that this will correct itself when the market inevitably rebounds. And while the talent war seen in 2021 and in the early part of 2022 has settled, we expect to see lateral movement of top talent as firms look for growth opportunities from other firms.
We also expect that while the hybrid work model occupied much of the conversation through 2022, we will see the emergence of many different versions of a flexible work model as firms grapple with what is best for their people, their clients and their businesses.
Given the inflationary pressures seen in 2022, law firms now operate under a higher cost structure, making it imperative that they continue to focus on both expense- and revenue-related operational efficiencies
Despite all these challenges facing law firms in the year ahead, we believe that, as we have seen in earlier challenging periods, the law firm industry will once again prove how resilient it is.