State of the Legal Market - Report by Thomson Reuters Peer Monitor and Melbourne Law School
Posted at Legal Practice Intelligence - 29 September 2016
The Australian legal market suffered its fourth consecutive year of declining demand, although the very largest “Big 8” firms are showing positive demand growth.
These are among the findings from a new report issued by Thomson Reuters Peer Monitor and Melbourne Law School, “2016 Australia: State of the Legal Market”.
The report is based on financial data drawn from the Australian offices of 21 major law firms, with analysis undertaken by Thomson Reuters Peer Monitor.
Demand, as measured by total billable hours, has been in a steady downward trend for most of this decade. Demand declined an average of 1.9% across firms within Peer Monitor in FY 2016 – its fourth consecutive annual decline, although the pullback was slightly smaller than the 2.0% drop in FY 2015, potentially indicating some stabilization. However, the law market continues to face financial hardship, with only approximately one-third of firms reporting revenue and profit growth in FY 2016.
The picture was somewhat brighter for the very largest firms, referred to as the “Big 8.” Those firms saw demand actually grow, rising 0.4% on average. But this modest gain was not nearly enough to offset an average decline of 3.5% in the remaining large law firms.
While Big 8 firms saw rising demand in construction and dispute resolution practices, that group experienced a decline in general corporate law advice. Other large law firms, however, averaged a slight increase in corporate demand.
Billing rates for all firms have marginally increased over the past three years, up 3.43%. However, this increase in billing rates correlated with a significant decrease in realisation, dropping to 79% against the standard rate, as firms are more willing to take on business while offering steeper discounts.
Indirect expenses increased slightly through the end of Q4, up 0.9%, while direct expenses remained stable with no percentage change on last year.
Firm profitability reversed sharply this year, stung by weak demand, stagnant rates and rising costs. Following modest gains in profitability in FY 2015, profits in FY 2016 fell into negative territory, declining 4.4% for Big 8 firms, and an even-steeper 9.0% for the remaining large firms.
“In the past, law firm managing partners were more convenors and coordinators than true leaders,” said Joel Barolsky, lead author of the report, and senior fellow at Melbourne Law School and principal at Barolsky Advisors. “The data presented in our report provides strong evidence that the legal market is rapidly changing and becoming more competitive. In this environment, firms require true leadership. Those partnerships not willing to be led will flounder. Those partnerships blessed with effective leaders will flourish. There will definitely be more winners and losers.”
“The challenge for Australian law firms is not simply the current weak demand and revenue picture,” said Michael Abbott, vice president, Client Management and Thought Leadership, Thomson Reuters. ”The bigger challenge is long-term, and whether firms are willing to boldly take on the mantle of change. The ground continues to shift beneath their feet. Firms must develop greater agility and creativity in addressing changing client needs, identifying new opportunities and adeptly executing their strategies to thrive in these persistent, difficult conditions.”
Click here to obtain a copy of the “2016 Australia: State of the Legal Market”
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