Heightened demand for legal services lifted the top and mid-tier law firms’ profits by an average 8.2 per cent in the past financial year. 

The 2018 edition of the CommBank Legal Market Pulse reveals that many firms are directing a portion of those profits toward investing in their ability to adapt to longer-term structural change.

Record confidence

The profit increase compares favourably with the 1.3 per cent increase recorded in the previous financial year. Stronger profitability appears underpinned by both growing revenues and improving margins. This could indicate that firms have better control of their costs and are driving efficiencies through using technology.

Meanwhile confidence around both industry and broader economic conditions soared from 20 per cent in 2017 to 85 per cent, the highest recorded in the Legal Market Pulse research series.

As firms expand their teams to meet client demand amid heightened activity across disputes, regulatory changes and strong corporate deal flow, the war for talent has intensified.

It is now the top business challenge, particularly among top-tier firms. At the same time, those underlying fundamentals appear to be providing some relief from last year’s biggest challenges – negotiating prices with clients and winning new business.

Market forces influencing change

However, firms are mindful of the potential for activity to ease, with confidence around conditions over the coming 12 months moderating to 63 per cent and dropping further to 37 per cent for the following 12 months.

The more subdued outlook may also reflect their understanding that they must respond to two dominant forces: changing client expectations and competitive forces.

The research highlighted an acute awareness among firms of the increasing power wielded by buyers of legal services and their ability to:

• Request more for less (seven in 10 top-tier firms and 20 in 31 mid-tier firms indicated this was of high or very high consideration)
• Push down prices (six in 10 and 17 in 31)
• Breed competitive tension through willingness to switch firms (five in 10 and 17 in 31),
• In-housing work (four in 10 and 11 in 31)
• Directly using legal process and services outsourcing (three in 10 and four in 31).

To support ongoing performance, savvy firms are therefore balancing the distribution of hard-earned profits to equity partners with reinvestment in their ability to adapt to longer-term structural change.

Preparing for change

The most common strategies to ensure they can future-proof the firm and grow the bottom line are:

• Flexible work arrangements, suggesting that talent retention is a priority (100 per cent of firms)
• Developing alternative fee arrangements in response to client pressure (95 per cent)
• Adopting new technologies to adapt to changing client expectations and better compete with more flexible and efficient rivals (93 per cent)
• Lateral hiring to grow revenues (88 per cent).

The top-tier firms are currently more advanced in their adoption of future-proofing strategies. They are particularly focused on legal process and service outsourcing, partnering with technology start-ups and adding a variable-cost lawyers service.

Over the next two years however, mid-tier firms are expected to match their larger counterparts in areas such as outsourcing and partnerships with start-ups. They are also more likely to enter new practice areas.

Emerging tech on the rise for mid-tier firms

Excluding salaries, firms intend allocating more budget to IT hardware and software than any other area in the year ahead as they take advantage of an improving return on investment in technology.

According to the research, 61 per cent of firms reported a moderate or high return from their IT investment, up from 51 per cent in the previous year. Thus, a net 73 per cent of firms expect to increase spending in this area over the next 12 months. That compares with 60 per cent in the previous year.

Adoption of technology has been dominated by top-tier firms in recent years, particularly in areas like e-discovery (54 per cent of firms overall versus 42 per cent in 2015) and cloud-based solutions (39 per cent of firms compared with 26 per cent in 2015). However mid-tier firms are keen to keep pace.

They are planning increased investment in data analytics, artificial intelligence and blockchain as they seek to meet an increasingly embedded client expectation for technology leadership and to reap the associated cost and operational benefits.

For more information, please find the full Legal Market Pulse at CommBank.com.au/ProfessionalServices

About the 2018 CommBank Legal Market Pulse

The report is based on a quantitative survey of CEOs, Managing Partners and other senior leaders. Forty-one law firms participated in the survey for this edition, carried out in August and September 2018 by Beaton. Participants include 10 respondents classified as top-tier firms and 31 respondents classified as mid-tier firms.