Demand for commercial legal services in the Australian legal market has been on a relatively steady downward trajectory for the past five years, and 2015 failed to break this trend, according to a newly released report by Thomson Reuters Peer Monitor and The Melbourne Law School.
The report goes into in-depth detail of many key findings on the current state of the legal industry in Australia based on 2015 financial year data.
Demand growth continued to decline as it has for the past few years. The overall decrease in demand was primarily attributable to the decline in demand for the industry’s three biggest practice groups: dispute resolution, banking & finance and corporate general. Despite the weak demand performance, 2015 contained some bright spots. For example, one of the most notable was that Q4 2015 demand growth was relatively stronger as it inched closer to neutral for the first time in almost three years.
Demand was not down across the board, however, as some practices did experience growth, primarily those that represent transactional work. Additionally, the success of firms in the market varied greatly based upon market segmentation. Overall, the Big 8 law firms tended to outperform the Large firms when analyzing demand. Additionally, the report sliced the data into domestic versus global firms, with some of the largest Australian firms represented in the global category: Allens; Ashurst; Herbert Smith Freehills; King & Wood Mallesons; Norton Rose Fulbright and DLA Piper (all other firms were categorized as domestic). The data suggests that despite a relatively larger decline in demand, global firms have increased profitability by capturing a bigger share of high-margin transactions work, thinning the ranks of partner (so called, “partner de-equitization”) and further reducing headcount.
The report also dives into other key metrics in detail—including productivity, rates and realization, expenses and profitability—while providing comparisons among the market segments. Lastly, the qualitative market assessment outlines various macro trends and their impact to the larger industry, among them: growth of new law firms, focus of talent diversity, use of off-shore legal process outsourcing firms (LPOs), and growth of legal project management, among many others.
As the report outlines, there is little doubt that the Australian legal market is in the mature phase of the lifecycle with declining demand, increased price-based competition and pressure on operating margins; however, the market will no longer tolerate mediocrity. It will be interesting to see going forward whether firms that don’t make the grade will simply fragment or fold.