New Sense of Optimism for Australian Law Firms

A new study of Australian law firms suggests the profession has moved on from a period of consolidation and profit protection in the previous twelve months to a position where they are both expecting and planning to increase rates of full time hires and elevate more lawyers to partner positions.

“75 per cent of all firms surveyed reported they expect to hire more fee earners in the upcoming financial year however the lead reason for this intention was the replacement of exiting staff followed by planning for and accommodating growth,” said Crowe Horwath Partner, Business Advisory, Andrew Chen.

“Average revenue per partner increased across all sized firms with the exception of the $20+ million annual fee band. Firms in the fee band of $5m–$10m pa had the largest increase in per partner earnings on the previous year whilst firms with annual billings of less than $5m had the highest expectations of revenue growth, projecting an average revenue increase of 17% in 2016,” Mr Chen said.

These findings are part of the annual benchmarking study of the profession undertaken by leading accountancy firm Crowe Horwath in partnership with the Australasian Legal Practice Management Association (ALPMA). Legal firms from all states in Australia participated in the annual benchmarking study.

Disruption. What disruption?

“Whilst disruption is widely acknowledged as a critical issue for law firms to address, the survey found law firms were not making any radical changes in this regard,” said ALPMA President and Financial Controller at the Lantern Legal Group, Mr Andrew Barnes.

“They are adapting, as a conservative profession could be expected to do, but doing so cautiously.”

The survey found the principle response to external changes was to seek to develop internal efficiencies, focusing on costs they can control. At some point, Australian firms will have to future-proof themselves by looking beyond internal solutions,” Mr Barnes said.

Marketing expenditure static

“I was surprised to see there was no discernible move to increase marketing and business development budgets in response to external factors, with the average spend on these activities stable at around an average 2 per cent of revenue across all firms.

“Digital marketing allocations continue to be modest, with firms spending around 15 per cent of their marketing budget on this activity. The small firms, those under $5million revenue pa, tended to be the biggest spenders in this category with digital market accounting for 22 per cent of their marketing spend,” Mr Barnes said.

Profitability stable

Based on the current and past surveys, there appears a consistent practice to maintain gross profit margins at 60 per cent, with costs steady at around 40 per cent of revenue. Average overheads exclusive of rent were broadly consistent with previous years, being 34 per cent in the current survey verses 36 per cent in the previous period.

“In terms of partner remuneration, 47 per cent of firms indicated the current levels were not expected to change in the 2016 financial year,” said Mr Chen.

“Not surprisingly, a majority of firms nominated the retention of talented staff as a key contributor to financial success. Perhaps surprisingly, internal appointments to partner were only made for 45 per cent of the participating firms.

2015 ALPMA/Crowe Horwath Australian Financial Performance Benchmarking research report is available now.