- Tech & Gadgets
- BRW. lounge
Published 01 August 2012 17:31, Updated 02 August 2012 05:05
The results from the 2012 BRW Top Law Firms survey indicate what every managing partner knows all too well – legal practice in Australia is undergoing a tough transition. “I’ve been in this game 34 years and the competition is as fierce as I have ever seen it,” McCullough Roberston chairman of partners Brett Heading says. King & Wood Mallesons managing partner in Australia Tony O’Malley agrees. “It’s really tough out there,” he says. “Demand for legal services hadn’t actually grown significantly for a number of years even before the financial crisis hit.” The forces that rocked global markets in 2008 didn’t trigger the legal industry’s transformation but they hastened the impact of slowing growth and stymied the possibility of substantially increasing fees. It also neatly punctuated the end of what many legal partners will remember as an almost golden era in commercial practice; a time when double-digit revenue growth was the norm, partnerships were comparatively solid and the firm hierarchy was comfortingly familiar. It’s in stark contrast to the landscape today. Demand is in decline, new competition is arriving, organic growth is elusive, revenue is being redistributed between firms as a new world order transpires, clients are increasingly cost conscious and none of these trends show any sign of abating soon.
“This will be a pretty tricky decade to work through”, Corrs Chambers Westgarth chief executive John Denton says. “It’s been five years since the financial crisis and I think we accept that pre-crisis was the aberration. This low- growth market is the constant, so the challenge is finding high growth within it.”
This is not to say law is no longer a lucrative trade; the largest law firms sold $5.7 billion worth of legal services in the year ended June 2012, representing a 7 per cent increase on the previous year. This is substantially higher than the 0.7 per cent annual growth business research firm IBISWorld ascribes to the $19 billion legal services sector for the past five years and is much higher than the prevailing sentiment suggests. BRW’s figures include several estimates. The fact more firms than ever chose not to reveal their revenue figures to BRW, despite doing so in the past, is a telling sign in itself. Whereas last year only two firms reported negative revenue growth, this year four admitted to going backwards.
“The legal industry is in a state of turmoil,” principal of specialist professional services consultancy Beaton Research & Consulting George Beaton says. “We’re seeing the continuation, and in some cases intensification, of trends which for the industry as a whole are adverse.” Some firms inevitably will prosper while others will suffer but Beaton says it’s difficult for everyone. “There is pressure on talent from global firms, clients are more aggressive on price, the volume of work is continuing to contract as clients take more work in-house or don’t litigate like they once did.”
Because the legal pie isn’t getting substantially bigger and raising fees is not feasible, the only way to achieve top-line growth is to either acquire new partners or new clients. The proliferation of intra-firm partner moves means firms are more vulnerable than ever to having their talent, or teams of talent, poached.
“Managing partners have never been so exposed as they are today,” Thomsons Lawyers managing partner Adrian Tembel says. “There’s a level of clandestine activity going on that just didn’t exist five years ago. It’s significant because it has fundamentally changed law firm culture. Where there was once certainty and confidence about your own partners, you now have to assume that every day there will be at least one partner contacted by a headhunter. You’re doing it and you’re getting it in reverse.”
Tembel says it’s too risky not to consider strategic opportunities in this climate. “Like every managing partner in the country, I have almost a full day every week to look at lateral hires and merger opportunities because that’s the reality of this market. You can’t rule anything out.”
Holding Redlich’s managing partner, Chris Lovell, says the old rules no longer apply.
“It used to be that mid-tier competed with mid-tier and big firms competed with big firms,” Lovell says. “That market strata is being eroded and everyone is now competing at all levels. There’s also competition on price, which has not always been the case.”
The battle for elite legal work has been heightened by the entry of international firms, including Clifford Chance and Allen & Overy, with a clear mandate to capture only the top-end work. This has prompted some firms to change their focus. “Some of the bigger national firms are now looking at work they didn’t previously find attractive,” McCullough’s Brett Heading says. “Small- and mid-cap listed companies, for example, have always been our stomping ground and we’re now under pressure,” DLA Piper’s managing partner in Australia, Tony Holland, says “The biggest impact over the next decade won’t be the opening of international firms as such but rather the strategies that each firm adopts and how successful they are,” he says. “How firms react to the changing demands will likely produce substantive changes in the profession.”
The conditions have already rewarded some. Although eight firms reported negative growth, another eight increased revenue by above 15 per cent. Hall and Wilcox topped the growth category with a 30 per cent increase in earnings. Freehills led the elite firms with an 11 per cent revenue increase.