Law firms’ perceptions of current business conditions improved materially from -37% to -18%, while expectations of likely business conditions in the coming 12 months picked up from 13% to 16%, according to CommBank’s latest Legal Market Pulse which surveyed 50 top- and mid-tier law firms in Australia.
Compared with our recent survey of accountants’, law firms aren’t nearly as optimistic as their counterparts in accounting. This is partly explained by the fact that it is only now dawning on the legal profession that clients’ buying power has changed irreversibly.
Negotiating price with clients is the second most challenging part of doing business. In the US they’re calling it the new normal.
However, the fact that sentiment has improved from six months ago indicates that law firms are beginning to respond to the reality that they’re operating in a buyer’s market.
Fixed fee work growing
The shift in buying power is evident from the fact that more than 25% of total revenue is coming from work done for discounted hourly rates and almost 20% from fixed fee work. The incidence of both arrangements is slightly higher among top-tier firms than mid-tier firms.
It is striking however that 88% of the top-tier firms believe the margin on their fixed fee work is around the same or higher than on the work they undertake at standard hourly rates. In contrast, 56% of mid-tier firms believe the margin on their fixed fee work is lower, indicating that large firms are pricing fixed fee work more profitably.
M&A activity lifts top-tier firms
Senior legal executives are less pessimistic about the economy’s prospects over the coming year. Compared with the previous Legal Market Pulse’s reading of -7%, they’re now net neutral.
The change has been driven by top-tier firms where optimism about the economy has lifted from 12% to 22% while the reading among mid-tier firms remains in negative territory.
The difference is partly due to the fact that larger firms get the lion’s share of merger and acquisition (M&A) activity in the economy. Being mission critical and therefore less price sensitive, M&A is generally a more profitable business area.
This is borne out by the finding that among the top-tier firms that grew revenue over the past 12 months, the most lucrative area of work was M&A and corporate advisory. This, along with the associated banking and finance activity, are among the areas where top-tier firms expect the best revenue growth in the next six months.
For more insights on mid- and top-tier firms, view the full CommBank Legal Market Pulse. For more information contact Marc Totaro, National Manager, Professional Services, on 02 9303 1940 or via email firstname.lastname@example.org