Law Firms Financially Resilient Despite Partner Profit Shedding

A study of Australian law firms reveals they are financially resilient and adapting well to an increasingly competitive market.

The report, led by leading accounting and advisory firm Crowe Horwath and the Australasian Legal Practice Management Association, indicates law firm profitability remains strong with margins between 54 and 64 percent for the financial year ending 30 June 2017, and 64 percent of participants meeting or performing above expectations.

Growth

“Despite the sluggish economy, client pressure and increasing competition, three quarters of firms surveyed expect to grow in 2018 by at least 10%, with the majority of growth being generated from new client prospects,” ALPMA President and Corporate Services Manager K&L Gates, Mr Dion Cusack said.

Partners are investing in new technology and recruitment of new partners to maintain a strong financial position.

The average revenue per partner increased to $1.4m and the gap between partner earnings across different sizes of firms continues to narrow.

“Barriers of entry for new law firms are low and firms are shedding profits per partner to invest in a new breed of firm and in the next generation of partners,” said Crowe Horwath Partner, Mr Andrew Chen, who led the research.

Most participants (57 percent) see the greatest threat to growth being the retirement of partners.

“This is not surprising given a quarter of participating firms have partners retiring within 18 months, but firms must ensure they have strong succession plans in place to counter this risk”, he said.

Other threats to growth of concern to law firms were the rise of online legal services and continued client demand for better value.

“The study also revealed that Australian law firms are shifting their focus from cost savings to investing in their firms and people,” ALPMA President, Mr Dion Cusack said.

“Interesting, there is little interest in offshore resourcing or contract based labour as an option to deliver work effectively in the current environment,” he said.

Pricing

“Firms did not consider price to be a limiter to growth and financial success of the firm” said Mr Chen.

Most firms (80 percent) continue to use the traditional pricing method based on hourly rates to bill their clients and there was little appetite to move to alternative models, with 85 percent of the firms surveyed saying they had no intention of changing their pricing methodologies.

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 seventh 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.

2017 ALPMA/Crowe Horwath Australian Financial Performance Benchmarking research report is available now.