Australian Law Firms Grow Solidly Amid Turbulent Conditions

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2022 Australia: State of the Legal Market Report 

Market fundamentals including rate growth appear “unusually sound”

SYDNEY, August 29, 2022 – Australian law firms performed well in fiscal year (FY) 2022 despite challenging conditions, to the point where the market may serve as a beacon for other firms globally who are similarly managing against recession fears, rising costs, and competition for talent.  

A new report issued by the Thomson Reuters Institute, 2022 Australia: State of the Legal Market, said that in recent years, Australian law firms have consistently outperformed their global counterparts, and FY 2022 further contributed to that continued outperformance despite a drop-off in the second half of the year.

FY 2022 is described as a “tale of two halves,” with demand rising a strong 6.4% in the first half, but  declining 2.1% in the second half. Corporate work, including mergers & acquisitions (M&A), which led much of the demand growth in the first half of the year, has since cooled off. However, much of the recent success of the Australian law firm market has been a result of no single practice area being the sole driver of growth. In fact, most practice areas saw demand grow in FY 2022, while several major practice areas including tax, real estate, and regulatory saw particularly strong growth in the five-to-six percent range.

Worked rate growth was especially robust, averaging 6.5%, compared to just 1.6% in FY 2021.

Strong Growth in Revenue and Profitability

The strong rate growth, coupled with the rise in demand, resulted in an average 8.7% increase in fees worked, a considerable jump over the previous year. Firms also saw significant improvement in billing realisation, similar to the U.S. and other markets.

While expenses rose, indirect expenses were at a level that is favourable when compared against prior to the onset of the pandemic. However, with direct expenses, Australian law firms are by no means exempt from the growing competition for talent. Nearly a third of Australian associates (31%) left their firm in the last year, a higher turnover rate than in the U.S. Despite this, Australian firms have largely managed to keep their associate salaries in check and well below the growth seen by firms in the U.S. Associate compensation at Australian firms grew by 8.3% over the last 12 months, compared with 11.7% for U.S. firms.   

The culmination of these factors was overall revenue growth of 10.0% for the average Australian law firm, a near record-setting level. And profits grew by an even stronger 12.6%.

“Australian law firms are uniquely positioned on the world stage, and continue to prove themselves remarkably resilient in dealing with conditions that are challenging law firms across the globe,” said Jackie Rhodes, managing director of Asia & Emerging Markets, Thomson Reuters. “Finding ways to engage with legal talent is key. And the evolving intersection of talent and technology means new opportunities for firms to improve efficiency and drive a culture of digital transformation to the benefit of the firms, their lawyers and their clients.”

Technology and Talent

As part of that digital transformation, Australian firms increased their investment in technology in FY 2022, growing tech spend by 5.3% following flat growth in FY 2021. Those investments could further help firms in dealing with competition for talent. According a recent Thomson Reuters survey, nearly a third of lawyers (29%) said they would be prepared to leave their firm for a more innovative firm.

Overall, the report concluded that while “challenges loom for the region…there are ample reasons for continued optimism.”   

Download the 2022 Australia: State of the Legal Market Report here.

Thomson Reuters

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