It's as though Australia's largest law firms have hit critical mass and something radical needs to happen before high growth continues. 2

It’s as though Australia’s largest law firms have hit critical mass and something radical needs to happen before high growth continues.

A continued feeling that some firms have yet to come out of the plateau that they are parked on marks another year of measured growth for Australasia’s leading firms.

“If you take a snapshot of us year to year, then there is a little bit of change in numbers. But, from the headcount view there is not a huge difference,” says Gavin Bell from the helm of the big ship Freehills. “There’s nothing fundamentally different in the economy and none of the forecasts are suggesting a huge change.”

It’s not necessarily a bad thing to still be on a plateau, however. After all, while things might not be going up, at least they aren’t going down.

Take Mallesons Stephen Jaques for example, where the firm is down 70 lawyers on the previous year. Of course, as managing partner Robert Milliner rightly points out, headcount is a snapshot in time. “These things are cyclical. We have a reasonably constant inflow of talented people and we are constantly hiring,” he says.

However, the numbers definitely show that headcount growth is not on the agenda of most top-tier firms. And that’s because profitability has to be protected – not just because partners want to take home oodles of cash, but because profitability is an essential criteria by which success is ranked – no matter how many managing partners tell you that it’s not all about money.

“The firms that are fighting for big billing work will find it more and more difficult,” says Michael Bradley, Sydney managing partner at Gadens Lawyers. “This will lead to rationalisation, and the fact that some of the big firms have consciously stopped growing is a consequence of their desire to maintain or grow profits levels.”

What this means is that in order for firms to grow – either in numbers or profitability – it has to be done at the expense of others. It’s dog eat dog in the legal world. “The market share of the large firms is static, although competition is fierce. Growth will come at the expense of competitors and will be driven by an absolute commitment to clients, niche speciality areas, process innovation and managing costs,” says Don Boyd, chief executive partner at Deacons.

At the top, it’s as though Australia’s largest firms have reached critical mass – that is the next leap forward will require something radical to happen.

However, law firms are rarely radical creatures so in the case of the largest firms it’s doubtful that radical action is going to come from within, but rather will be imposed on them. “It’s hard to see something radical happening,” agrees Danny Gilbert, managing partner at Gilbert + Tobin. (Although ALB will be happy to eat humble pie on this one, should one of the top-tier prove us wrong.)

What shape could that radical action take? Well imagine a splinter group from one of the big firms with poorer profits for example – and not necessarily to join a rival top-tier firm, but maybe to set up a boutique corporate practice in Sydney. What about a significant merger between two biggish mid-tier players which is prepared to attack the weaker members of the traditional top-tier? Other possibilities include an IPO – or bringing in private equity money in order to give businesses with over $200m in turnover the kind of working capital that they need.

However, probably the most radical event in the Australian legal market would be the arrival of a foreign player to put the cat among the pigeons.

For that, ALB has its eye on DLA Piper Rudnick Gray Cary – the world’s second largest law firm that has traditionally thought nothing of vacuuming up practices in far-flung jurisdictions. In addition, with its notoriously tight equity and eat what you kill approach, is the reason why DLA Piper can exist in low-margin jurisdictions like Scotland without batting an eyelid at the possible negative financial effect.

Phillips Fox chief executive Tony Crawford alludes coyly to the firm’s ‘preferred referral relationship’ with DLA Piper but if the legal monolith did decide to sail into Sydney’s harbour ALB can’t help but doubt there would be a line of firms to welcome its arrival shouting ‘pick me, pick me’.

Growth in Australia exists, but you need to know where to look for it.

An example of one firm that is currently mining a gold stream is Baker & McKenzie which kept its headcount nearly static but increased revenue by 16% for the last financial year.

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