Australian Law Firms Rally Despite Expense Growth Challenges
Australian law firms finished the second half of fiscal year (FY) 2023 strong, rebounding in the face of softening demand and rising expenses in the first half of the year. That’s among the takeaways from the 2023 Australia: State of the Legal Market Report, which examines Thomson Reuters Financial Insights data from 20 law firms in Australia alongside metrics from more than 230 firms in the United States and the UK.
Legal Current highlights the report’s key findings and shares reactions from Australian legal media.
In Lawyers Weekly, editor Jerome Doraisamy summed up the report: “New research shows that Australian law firms are weathering softening demand and rising expenses well, but declining productivity – together with headcount increases outpacing demand growth – are causes for concern.”
The report found that Australian firms offset the first-half decline in demand with a 6% surge in the second half of FY 2023 and solid growth in worked rates, which jumped 5.3% year-on-year. Australian firms’ second-half comeback was driven, in part, by the rise of counter-cyclical practices.
Counter-cyclical practices, including dispute resolution, insurance coverage, insurance defense, workplace relations, and insolvency & restructuring, accounted for one-third of all hours logged. These practice areas delivered most of the demand growth, achieving 8.5% growth in the second half of FY 2023.
The Australian legal market’s transactional practices declined by 0.6% on a year-over-year basis yet outperformed other global markets in the second half of FY 2023. Australian firms saw transactional demand grow by 4.9%, compared to a 2.6% decline in transactional demand decline for U.S. firms.
Long-term challenges include continued double-digit expense growth, with both direct and indirect expenses affecting firm profitability. Australian firms’ direct expenses rose an average of 11.4% in FY 2023, likely due to headcount increases and talent becoming more expensive. Rising indirect expenses are also impacting revenue growth, with inflation-driven cost increases hitting marketing & business development and knowledge management the hardest.
Against this backdrop, Australian firms saw profits per equity partner drop for the first time since FY 2016, as firms experienced profit margins declining by an average of 3.3%.
Talent is also cause for concern, with the report noting, “Australian lawyers appear uniquely dissatisfied with key aspects of their firms compared to their global peers.” A troubling finding was that high-performing Australian lawyers said they’re less likely to stay at their current firm than their global peers.
“Worryingly for firms, pay was not the main source of their discontent,” reporter Maxim Shanahan noted in Australian Financial Review’s coverage of the report.
Finally, the report detailed uncertainties over the impact of generative AI, which aligns with findings of the Future of Professionals Report that showed legal professionals’ concerns around AI include accuracy, data security, and ethics.
For more Australian law firm insights, download the 2023 Australia: State of the Legal Market Report.