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Legal Marketplace

Forum: A tale of two markets: “It was the best of times, it was the worst of times, …”

· 5 minute read

· 5 minute read

In the new issue of Forum, we look at 2 legal markets — in the U.S., which saw a deep demand decline during the pandemic, and the Australian, which did not

The global pandemic has had a measurable effect on all markets across the globe, and the legal industry has been no exception. While the first quarter of financial year 2020 ended with uncertainty on the horizon, the pandemic and the ensuing effects were much more visible in the second quarter.

Indeed, the midyear point of 2020 showed significant declines in legal demand in the U.S. legal market and many of the other global legal markets — with one notable exception, Australia. To see why, let’s take a look at what happened in the legal markets of both countries.

The US legal market

Most of the quarantine, stay-at-home orders, court closures and broader economic shutdowns occurred during the second quarter. Consequently, the U.S. legal market experienced the largest quarterly drop in demand since 2009.

On average, demand for legal services decreased by 5.9%, relative to the second quarter of the previous year. Along with the decline in demand — and partially owing to the significant growth in lawyer head count over the preceding 12 months — the U.S. market also experienced a corresponding drop in productivity of 7.2%, on average.

The drop in hours worked per lawyer, however, has not affected all lawyer titles equally. In fact, partners have begun completing a higher proportion of work by volume. The cause of this is likely due to two factors: i) partners holding onto more hours to maintain their trajectory toward achieving their own billable hour goals through uncertain times; and ii) law firm clients have an increased need for advisory services that cannot be completed by less-experienced lawyers.

One surprising end result of these trends was that the growth in the average worked rate — often called agreed rates, or those rates that a firm agrees to with particular clients for work on given matters — was at an all-time high. In fact, the average worked rate charged across the market was 5.2% higher than at the same point last year, roughly a full percentage point higher than growth levels recorded through the first quarter’s pre-pandemic phase.

While the COVID-19 virus has forced law firms to implement essentially overnight changes to the way law is practiced, it has also offered firms the opportunity to reimagine how they deliver their legal services.

Law firms have also rapidly cut expenditures in most areas. Many overhead expense areas have seen significant decreases in spending, such as marketing and business development, which decreased by an average of nearly 20% on a rolling 12-month basis. Other areas, such as technology, reflect a clear dichotomy of heavy investment by underprepared firms, coupled with significant cuts at other firms that may be more risk averse with bottom-line concerns. And while furloughs and layoffs have not yet become ubiquitous among lawyers, they are currently much more widespread among the ranks of the support staff.

Some have opined that many of these roles that were made redundant will not be brought back in the future, and job roles such as legal secretaries may go the way of the dodo bird. Resulting from these cuts, profitability metrics through June are much higher than one might initially suspect in the throes of a global pandemic.

The Australian legal market

Law firms in the U.S. and elsewhere around the world must find themselves envious of the position in which the Australian legal market currently finds itself. The Australian market was insulated from many of the negative factors that so affected the rest of the international legal community for several reasons.

First, the virus has had a measurably lower impact on Australia compared to other countries because it is relatively isolated geographically. Furthermore, courts in Australia already had virtual capabilities, so regular court proceedings could continue despite the pandemic. And financially, the continuation of royal commission work helped cushion law firms against the harsh economic realities faced by firms in other parts of the world.

By comparison, while legal demand contracted by 5.9% in the US, demand grew in Australia by an average of 6.2%, during the same period. Fees worked — a proxy for revenue — also grew by 8.4% in the country’s fiscal fourth quarter (which ended June 30) amid the pandemic.

As in the US, indirect expenditures in Australia have been significantly affected by the pandemic, with a marked downturn in fiscal Q4. Support staff compensation, the largest area of overhead expenditure by proportion, decreased by nearly 10.7% in Q4 alone, further illustrating that the first wave of precautionary layoffs has largely spared lawyers.

Conversely, technology expenditures in Q4 increased by an average of 6.4% across the market. This has been a result of rapid investment that Australian law firms have made in technological solutions to ensure business continuity during the pandemic.

Looking ahead

The legal landscape in the U.S. has been the subject of many oft-discussed changes and rumors of changes on the horizon for the better part of a decade. To paraphrase Mark Twain, reports of the “death of the billable hour” have been greatly exaggerated.

That said, this time does feel different. While the COVID-19 virus has forced law firms to implement essentially overnight changes to the way law is practiced, it has also offered firms the opportunity to reimagine how they deliver their legal services and how they can cut non-necessary legacy processes and positions.

The rapid pace of change may be unsettling for some, but according to law firm leaders all over the world, many of these changes are here to stay.

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