Law Firms Cashed Up to Innovate & Grow

Results from the 6th ALPMA/Crowe Horwath Financial Performance Benchmarking Study of Australian Law firms

A new study of Australian law firms reveals there has been a significant boost in technology investment as the sector positions itself for strong growth backed by improved cash flow and financial performance.

The report led by national accounting firm Crowe Horwath and the  Australasian Legal Practice Management Association (ALPMA) indicates there is a growing appetite for digital transformation in the legal profession. The survey found that 30% of legal firms are heavily investing in new technology to improve the way they deliver services to their clients. Digital disclosures, client portals and live chat along with cloud technology are among the tools driving the innovation boom across the sector. The increase in digital uptake is the result of the impact of internal inefficiencies and staff costs on firm profitability.

The study focused on the financial characteristics of Australian law firms that drove innovation and growth during the 2015/2016 financial year, and it found that firms are cashed up for growth. The average growth outlook was 10%, with 36% of firms indicating they had specific plans to recruit for growth.

“Firms have their financial fundamentals in place. Revenue per partner has increased to $1.3million per partner, and fees are being converted to cash faster” said Crowe Horwath Partner Andrew Chen, who led the research.

ALPMA president Andrew Barnes said the study also revealed that Australian law firms are shifting their focus from cost savings, and actively investing in recruiting, with 92% of participants indicating they expected to hire in the next year.

“This is an important turning point for firms. Growth and sustainability in firms is not an outcome of cost savings. There are many indicators in the market which show firms having success when they pushed forward to differentiate and prepare for future opportunities,” said Mr Barnes.

Legal firms from all states in Australia participated in the annual benchmarking study.

The future: Succession planning

The survey showed that most law firms have been practicing for almost 40 years, with the average partner aged between 40 and 50 years old. Despite this, 40% of firms said they expect partners to retire in the next 18 months and were planning to appoint new partners.

“Based on our research, it is clear that legal firms believe managing this succession is a major disruptor for growth. On top of this, gender balance is still an issue across the legal sector, with only 22% of partners being female,” said Mr Chen.

Billing: Tradition rules

The traditional approach of hourly rates and fixed fees are still driving the financial outcome of firms and dominating their billing structure. Similar to last year, the study found that hourly rates represent 70% of all billed fees.

While various firms are embracing change and innovation, when it comes to billing, 90% of participants say they have not and do not intend on changing their methods.

Profit Efficiencies

This year, a stronger focus on overheads helped drive the average profitability across all firms, which rose from 17% last year to 19%.

Participants have indicated they are able to leverage prior year skilled staff and are focusing on employee retention and refining expenditure at the overhead level in order improve profitability. Firms are now looking to build from a more disciplined base by growing revenue streams – by diversification in services or targeted recruitment.

Firms within the $10million- $20million band were the only ones to see a minor gross profit increase of 2.7%. Gross profit decreased slightly across most bands during 2015/2016.

“Understanding margins and how they drive firm profits is becoming more of a management tool than pure statistical outputs from practice software. Many factors influence a statistical analysis and one lever may work for one firm but not another. What is universal however is that all of the stats still need to transform into numbers on a P&L and the high level gross margin is the first real indicator of profit,” said Mr Barnes.

The ALPMA Crowe Horwath Financial Performance Benchmarking study uses Crowe Horwath’s proprietary benchmarking tool, Open Measures, to compare participating Australian law firms. This is the sixth consecutive year the study has been undertaken with the aim to assess the financial health of legal practices and help firms benchmark their performance to their peers.

Interested readers can download a free copy of the results summary report from the ALPMA website.

2016 ALPMA/Crowe Horwath Australian Financial Performance Benchmarking research report is available now.