“The report serves as an important reminder of the centrality of people to the legal services sector.”
Each year, Thomson Reuters produces a report focused on the “State of the Legal Market” in Australia. The quote above is a strong indicator of the most important reason Australian law firms remained resilient over the pandemic. It also highlights what law firm leadership should focus on as they guide their businesses over the tricky period ahead.
As we have done for the past three years, the below sets out EG Consulting’s thoughts and comments in relation to our on-the-ground experiences over FY21/22.
A Tale of Two Halves
From July to December 2021 (FY22-H1), demands grew 6.4% which was better than Asia (-1.2%), the US (4.3%), and only topped by the UK which grew 8.3%. We were all aware of the incredibly buoyant corporate markets during FY22-H1, due to cheap liquidity in capital markets and government stimulus. However, from January – June 2022 (FY22-H2), there was a seismic shift as the Australian demand entered the negative.
General corporate demands went from 10.6% to 2.9% and M&A activity dropped from 19.8% to 3.1%. Even with these contractions, a strong performance in Corporate throughout the year outweighed the significant -3.9% contraction in Dispute Resolution – a practice area that has traditionally buoyed Australian firms.
We experienced the reduction in Corporate workflows first-hand. During FY22-H1, all our clients – across all levels of firms – were looking to hire Corporate lawyers within all specialisms at an alarming pace. This slowed at the start of the calendar year and most corporate teams are now back to a pre-pandemic level of hiring (and importantly, returning to their previous standard of requirements).
However, it’s not all negative. The US and UK firms who have maintained positive growth during FY22-H2 have done so from a period of contraction over the pandemic, something not experienced by Australian firms. Australia has still maintained growth on growth for the last five years, even with the staggering contraction in FY22-H2.
Performance Indicators
Key performance indicators were all bettered in FY22 compared to FY21, aside from utilisation and demand growth (which ended the year very similar to FY21: 2.1% vs 2.2%).
Worked rates (hourly rate after discounts) saw growth up to 6.5% vs 1.6% the year before, which was a direct result of Partners logging more time compared to other associates. The inability to hire sufficient resources resulted in firms being under constraint. This resulted in firms being critical of the work they took on and enabled them to focus on workflows with less price sensitivity.
Fees worked (worked rates multiplied by demand) is a metric used as a proxy for revenue growth. This was up from 3.6% in FY21 to 8.7% in FY22 and combined with billing realisation (which showed significant increases), accounted for the extremely strong revenue generation in FY22, despite the contraction seen in FY22-H2.
Overall, revenue growth was up 10% in FY21 for the average firm, which is a near record level of growth. Profit growth was up 12.9% in FY22, even with the contraction in FY22-H2 and the increase in expenses post-pandemic.
Expenses had remained low during the pandemic and there is a concern that this revenue growth will be impacted by rapidly increasing expenses in FY23. That said, the only indirect expense that has increased in comparison with FY20 (pre-pandemic) was that of support staff compensation and recruiting, showing the “war on talent isn’t just for lawyers but for [support] staff as well”.
Summary
As global markets enter a challenging time, there is general positivity in the Australian legal market. Given the resilience of Australian law firms during the pandemic, there is real hope that the coming storm will be weathered well in Australia. In the context of other global jurisdictions, Australia is likely to be the best region in which to be practising law over the coming months and years.
