Reports show a drop in demand for legal services this year and law firm leaders are questioning whether widespread associate salary hikes were such a good idea. The tepid demand and increase in lawyer head count have led to a declining productivity that affects the economic health of law firms.

According to Citi Private Bank, its 193 law firms including 130 of the nations' top 200 law firms reported a demand growth of 0.1 percent for the year. In a press release, Peer Monitor that measures the health of large law firms also found a drop in demand of 0.6 percent making it the first annual decline since 2013. Also, both reports found a drop in productivity and part of the reason was the increase in headcount. Peer Monitor says the recorded increase was the largest annual jump since 2012.

As demand was slipping, law firms still increased its hiring that adds to the headcount and direct expenses. The 5.4 percent increase in compensation expenses has made law firm leaders question the intention behind associate salary hikes that was done for competitive rather than performance reasons, ABA Journal reported. "In our conversations with firm leaders, many express bafflement as to why so many firms adopted the increases when their productivity and profitability results couldn't support them," an advisor said. Law firm leaders announced the associate salary increase of $180,000 last year to competitively compensate its finest legal talents.

Mike Abbott, vice president of Client Management and Global Thought Leadership, noted 2016 as a challenging year for US-based large law firms. Based on the data, the law firm leaders faced  "client pricing pressure, the down-market movement of certain legal work, the effective death of the billable hour owing to budget caps and growing competition from alternative legal service providers," he said. 

Those factors weakened demand, productivity and ultimately, profitability but the hope is not lost as Abbott is optimistic that law firms will make it this 2017. He advised law firm leaders to make bold and innovative moves to adjust their legal services and strategies to yield great results in all the factors, this year.