Australian Law Firms See Demand Growth Comeback Strong in Second Half: 2023 Australia: State of the Legal Market Report

SYDNEY, September 7, 2023 – Thomson Reuters (NYSE/TSX: TRI), a global content and technology company, today released its 2023 Australia: State of the Legal Market Report. The Thomson Reuters Institute-produced report shows that Australian law firms weathered softening demand and rising expenses well. Still, longer-term challenges of expense growth, keeping lawyers happy and the rise of generative AI remain on the horizon.

During financial year (FY) 2023, law firms in Australia saw demand growth averaging 1.3% year-on-year. The 6% surge in demand during the second half of the year offset the decline in demand in the first half, down by 3.4%. In addition, worked rates – rates clients agree to pay – grew by 5.3% year-on-year, compounding record-holding growth from the previous year.

“The 2023 financial year was a remarkable comeback story for Australian law firms, who managed to overcome a difficult first half and achieve positive growth in demand, ending the year near the profitability levels of last year,” said Jackie Rhodes, managing director, Asia & Emerging Markets, Thomson Reuters. “Firms demonstrated resilience and adaptability in the face of continued economic recovery, inflation, and geopolitical uncertainties, leveraging technology and innovation to deliver value to their clients and stakeholders.”

Rise of counter-cyclical practices

Counter-cyclical practices – dispute resolution, insurance coverage, insurance defence, workplace relations, and insolvency & restructuring – were vital to firms’ comeback in FY 2023. These practices, which account for one-third of all hours logged, provided the bulk of demand growth in FY 2023, improving by 3.9% vs. FY 2022, and achieved 8.5% growth in the second half of FY 2023.

While transactional practices – general corporate, mergers & acquisitions, banking & finance, real estate, and tax – declined by 0.6% on a year-over-year basis, the Australian legal market outperformed other global markets in the second half of FY 2023, with law firms in Australia seeing demand grow by 4.9%, whereas the firms in the U.S. saw demand decline by 2.6%.

Cost expansion affects profitability

Rising costs, both direct and indirect expenses, remain a concern and outstripped revenue growth. Total expenses for the average law firm grew by 11.6% in the past 12 months.

Firms’ direct expenses grew an average of 11.4% in FY 2023, continuing double-digit growth from FY 2022 (13.4%). This rise is likely due to headcount increases and already-hired talent becoming more expensive. Unlike global counterparts, law firms in Australia have continued to hire qualified fee earners and increase headcount by 4.7% in FY 2023, maintaining its aggressive hiring since 2018.

Indirect expenses for firms’ support functions and infrastructure grew by an average of 14.3% this year, with all major indirect categories experiencing inflation-driven cost increases. Marketing & business development and knowledge management saw the largest jumps year-on-year, with technology, office and recruiting expenses also significantly increasing.

The report found that lawyers are becoming more expensive and less productive, as indicated by both hours-worked-per-lawyer and profit-per-lawyer perspectives. The decline in productivity suggests that firms have not yet recovered from the utilisation decline in FY 2022, and headcount increases outpacing demand growth.

With expenses growing faster than demand growth, Australian law firms saw the average profits per equity partner (PPEP) contract for the first time since FY 2016. PPEP declined 3.1% over the past twelve months. This decline is an improvement compared to the 9.3% decline in PEPP during Q2 FY 2023 on a rolling 12-month average due to weaker demand, rising expenses and strong baselines. The latest 12-month figure indicates that firms are trending in the right direction.

Additionally, rising costs led to an average decline in profit margin of 3.3 percentage points compared to FY 2022. Recovery seems possible as recent indicators of stronger demand and slowing expenses are working in firms’ favour.

Discontent in the ranks

Australian lawyers appear dissatisfied with critical aspects of their firms compared to their global peers and less positive in the net promoter score, giving their firm +56% compared to the global average of +68%. Australian standout lawyers also pose a much higher flight risk than global lawyers, with 65% responding they were “somewhat unlikely/highly unlikely” to leave their current firm vs. 80% globally. Discontent among lawyers suggests the potential for pushback if firms decide to make too aggressive moves that lawyers disagree with.

Generative AI

The 2023 Australia: State of the Legal Market Report outlines three possible scenarios or alternative futures law firms for how the nascent technology may affect the industry: The High Road, where generative AI increases client’s perceived value and firms can extract similar or even greater margins; The Low Road, when generative AI adoption by law clients changes the relationship with their law service providers and forcing firms to reduce costs; and The No Road where generative AI has no significant strategic impact and the hype is disproportionate to its actual utility. While it is still too early to know the technology’s influence, the report recommends how firms can prepare for generative AI.

Download the 2023 Australia: State of the Legal Market Report here.

---

Methodology

Over the course of FY 2023, the financial metrics in this report were collected from Thomson Reuters Financial Insights data, which is based on the accounting systems from 20 participating law firms operating in Australia. These include some of the largest firms by lawyer count in the region. Global metrics are based on 235-plus law firms, primarily located in the US as well as the UK, which also participate in the Financial Insights program. Some numbers may have changed since the issuance of the FY 2022 report as new firms were added to the sample. To add further depth to this examination, data is also included from Thomson Reuters Stellar Performance, a regular survey of 2,400 standout lawyers (as nominated by clients) of which 79 were Australia based. Those respondents provide the internal perspective to these law firms. Client insights included in the report were based on interviews with 99 Australian legal service buyers over the course of financial year 2023 coming from Thomson Reuters Market Insights.

About Thomson Reuters

Thomson Reuters (NYSE / TSX: TRI) informs the way forward by bringing together the trusted content and technology that people and organizations need to make the right decisions. The company serves professionals across legal, tax, accounting, compliance, government, and media. Its products combine highly specialized software and insights to empower professionals with the data, intelligence, and solutions needed to make informed decisions, and to help institutions in their pursuit of justice, truth, and transparency. Reuters, part of Thomson Reuters, is the world’s leading provider of trusted journalism and news. For more information, visit tr.com.

Media Contact

JJ Minder
jj.minder@thomsonreuters.com