Profit growth expectations of Australia’s legal firms have eroded, with CommBank’s latest Legal Market Pulse showing business confidence has fallen from its 2018 peak.

In 2018, business confidence reached its highest point since the CommBank Legal Market Pulse began in 2010 following an uplift in client demand in areas such as disputes and regulatory compliance, and strong corporate deal activity. This year’s report shows that firms’ confidence in current business conditions have eased from a net positive reading of 85 per cent in 2018 to 54 per cent in 2019, and the outlook looking forward two years has fallen to just 10 per cent.

Despite conditions softening, confidence levels are still currently running above their 5-year average and firms report healthy profit growth of 6.3 per cent in FY19, down from 8.2 per cent the prior financial year. This is flowing through to partner distributions, with firms reporting net 45 per cent of firms reporting increases in Profit Per Equity Partner (PPEP), down marginally from 49 per cent in 2018.

Expected profit increase (FY19 versus FY18):

Marc Totaro, National Manager, Professional Services Business & Private Banking, Commonwealth Bank of Australia, said: “As firms grapple with fluctuations in client demand, striking a balance between efficient service delivery and quality, sustainable client service has come into sharper focus.”

“While profit growth continues to underpin short term confidence, firms are starting to look further ahead at where they can invest. In fact, firms are still vying for top talent and lifting training and development budgets to ensure they have the capabilities they need in future,” Mr Totaro said.

To meet future changes in workload and address the needs of value-conscious clients, firms are implementing a number of strategies. From a staffing perspective, firms are most likely to be hiring both junior and senior lawyers in the year ahead, with 51 per cent of firms indicating a net increase in these roles. While mid-tier firms are also looking to increase the use of contractors in these roles, top-tier firms have decreased the proportion of contractors in all positions except for paralagals.

Firms are also looking closely at their service delivery models, and have increasingly engaged legal process outsourcing (LPOs) and legal services outsourcing (LSOs) providers. However, this has only edged up with 51 per cent of firms now using or planning to use outsourced providers, up from 43 per cent six years ago (the last time the Legal Market Pulse addressed this topic). Firms also report that outsourced work accounts for only two per cent of their fee-earning activity, well below the forecast seven per cent cited by firms in 2013.

Proportion of fee earning work outsourced to LPOs and LSOs:

“The use of outsourced providers is on the rise as firms seek to free up internal resources to focus on quality service delivery and responding to client demand for greater cost efficiencies. We have seen some of the larger firms go even further, investing in legal tech start-ups, striking up exclusive collaborative agreements or establishing their own LPOs and LSOs,” Mr Totaro said.

Firms are building their broader capabilities in both legal and non-legal practice areas in a bid to meet changing client demand. The top areas for expansion for all firms is higher margin corporate advisory work. Firms also continue their push into non-legal services which they report as a rising source of revenue.

The majority (54 per cent) now offer non-traditional or non-legal services, compared to 42 per cent four years ago, and over that time, the proportion of firms that derive at least 2.5 per cent of their revenue from diversified services has almost doubled from 23 per cent to 45 per cent.

“Many firms continue to introduce non-legal services to meet more complex and holistic client demands, with some also responding to competitive pressures such as the Big 4 accounting firms growing legal practices. This is a growing source of revenue for these firms and this is expected to increase over the medium term,” Mr Totaro said.

You can find the full Legal Market Pulse here. 

Important information:

CommBank Legal Market Pulse is a wide-ranging analysis of the Australian legal sector. The report is based on a quantitative survey of CEOs, Managing Partners and other senior leaders. Forty-one law firms participated in the survey for this edition, carried out in July and August 2019 by Beaton Research + Consulting