How the Australian Law Firm landscape has evolved in the brave new world
In the last 6 years, the larger law firms in Australia have made a seismic shift away from focusing on increasing partner numbers to the continued growth, or maintenance, of recently challenged profit margins.
A number of different factors have acted as catalysts for this shift including:
- The GFC’s effect on global transactional activity;
- This reduced transaction flow had a negative impact on many law firms’ profits;
- The increasing trend of global clients moving towards wanting a more seamless global approach to the way that their work was being serviced.
Anecdotal feedback from partners, during this time, was that some firms lost as much as 40% off their bottom line. There was quite a great deal of pressure placed on many firms to focus on increasing that profit to remain competitive; not just to their own partners but also to potential external partner recruits and global merger suitors.
Australian firms reacted in different ways but the immediate panic drove the focus towards increasing profit at all costs by:
- Increasing charge out rates when they could;
- Decreasing staff numbers;
- Reducing or suspending the rate of partner appointments by either changing the criteria to become a partner or shifting some more junior categories of equity to salaried.
- Retiring partners that were not performing well;
- Increasing focus on higher margin areas of practice and de-emphasising lower margin areas of practice.
As a consequence many law firms have lost partners as they struggled to remain competitive in the brave new world.
However the refocus on profits and increasing globalisation of some firms has had positive consequences including:
- Firms are being more proactive in dealing with poor performing partners which has led to greater efficiency;
- Small to medium size law firms have been able to capitalise on the changes in the marketplace by recruiting quality partners that have fallen out of the top tier during this time, especially in the more margin sensitive or market challenged areas such as planning, property, some areas of banking and insurance.
- The top tiers and global firms moved away from being generalists to being smaller and more nimble and focusing on key strategic niche areas such as infrastructure and global finance.
- There has also been a move of law firm clients towards being more discriminating about fees which has led, in some instances to in-sourcing more legal work and law firms being more creative with pricing models, as seen recently.
- Mergers with global firms;
- Mergers with national firms;
- Top performing partners leaving larger firms to start their own boutique firms;
What has been consistent throughout this period is the continuing focus on increasing profit and firms further refining their positioning irrespective of size. The shift away from bigger is better is a massive change in the Australian law firm market and has created a more nimble and fluid approach to client servicing, law firm structure and also partner recruitment strategy.