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Australian Law Firms Face Continued Pressure

Australia’s largest law firms are facing continued pressure and competition from the growth of inhouse legal teams, according to a report from Melbourne Law School and Thomson Reuters.

The AFR reports that it is the third consecutive year for the trend with an overall drop of two percent, but with considerably greater falls in key areas like banking and finance (11.7 per cent) and dispute resolution (6.4 per cent).

“Firms that choose complacency and mediocrity will rapidly find themselves on the outer,” Melbourne Law School dean Carolyn Evans said.

“The environment is too competitive to allow firms to engage in business as usual while their clients are demanding innovation and cost containment – if clients are not finding their demands met, there are plenty of old and new firms with a hunger for the more limited work available.”

The market disruption is happening against a backdrop of growing numbers of law graduates, Professor Evans warned. In contrast, enrolments in the United States are plummeting.

Profit figures remained strong due to the slashing of partner numbers by 5 to 10 per cent over the past three years: profit per equity partner edged above $700,000 among big eight firms and $750,000 at global firms.

Global firms – which include heavy hitters Allens, Ashurst, Herbert Smith Freehills, King & Wood Mallesons, Norton Rose Fulbright and DLA Piper – maintained the biggest collective hit to demand, down by 4.7 per cent compared to just 1 per cent for domestic firms. Although some firms reported significant profitability spikes in the past year, including HSF and Ashurst, Australia-specific data was not made public.

Barolsky Advisers managing director Joel Barolsky said that the domestic firms seemed to be “winning” in litigation, intellectual property and general corporate advice; whereas global firms were ahead in M&A and property.

Investment in technology

“It begs the question whether a global brand puts a firm at a disadvantage in targeting work perceived as domestic or jurisdiction-specific,” he said.

Firms are reacting by investing in technology, project management and offshoring routine work. Corrs has a freelance network, Allens recently opened a new start-up arm, Accelerate, and a number of the global firms have offshore processing hubs.

“Law firms are banking on technology to make step-change improvements in efficiency and effectiveness,” said Mr Barolsky.

 

The report covers the nation’s eight largest firms plus selected big commercial law firms. The final quarter of the 2015 financial year recorded a marginal increase in demand – measured as total billable hours worked by all fee earners – but the report hesitates to predict that it is the mark of a turning tide.

Mr Barolsky said that recruitment spending was up by 10 per cent for the year; a promising sign after an 11 per cent drop in total lawyer headcount in the big eight firms over the past three years.

Partner levels at most of the large firms have dropped. Allens fell from 176 to 148 partners over the three year period; Clayton Utz from 198 to 178; and DLA Piper fell below the century mark with 89 partners down from 111.

As partner numbers at firms fall, law firm numbers continue to rise.

The report shows that the tsunami of foreign law firms entering the Australian market in the past five years either setting up for the first time or creating links or mergers with local firms.

Entry has slowed but they continue to arrive, including Pinsent Masons and Hogan Lovells in July. In the past 18 months, more than 20 boutique firms were set up in Australia, including small outfits Talbot Sayer in Brisbane – which topped M&A league tables a year after opening doors – and Clarendon Lawyers in Melbourne, who poached Allens managing associate Susie Stone this week and K&L Gates partner John Mann earlier this year.

“Rather than having a profession that’s crowded or too big or too small, what I think you have at any given time is a dynamic market and some firms that are reading the market better than others,” Allens chief executive partner Michael Rose said.

“Three or four years ago [foreign] firms were making decisions based on Australia being at the top of the resources boom, future of growth in China and a strong Australian dollar.

Source: The Australian Financial Review

 

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