Thomson Reuters Institute
2022 Australia: State of the Legal Market Report
Matthew Harding – Dean, Melbourne Law School
I am delighted to introduce the 2022 edition of “Australia: State of the Legal Market.”
This report contains a wealth of information and commentary on the state of our legal services sector. It provokes deep reflection on some key themes.
One theme is change and uncertainty. Our world has changed profoundly as the pandemic — and all that has followed in its wake — brought about radical transformations in the way we work and study. These transformations are ongoing but at the same time demand thoughtful responses even as they unfold. As the report makes clear, the transformations find expression in staff movement and expectations, and employers are called upon to devise imaginative and humane solutions.
Equally significant are the seismic shifts in geopolitics and the global economy that have emerged in the form of war and inflation in 2022. The report alludes to the potential impacts of these shifts on the market for legal services in the coming years.
The data and commentary in this report speak to the revolutionary potential of technology in legal practice and the importance of curating and nurturing lawyers themselves.
At the same time, this report serves as an important reminder of the centrality of people to the legal services sector. Technology is an enabler of almost breathtaking potential, but in the end, it must be harnessed in support of the individuals whose judgment and skill are at the core of the legal profession and its distinctive value to clients.
The data and commentary in this report speak to the revolutionary potential of technology in legal practice and the importance of curating and nurturing lawyers themselves — this merits careful reading and consideration. Finally, this report shines a light on the importance of sustainability in organisations. Sustainable legal practices mean manageable workloads and realistic expectations in respect of growth and profits.
For academics charged with the education of the legal professionals of tomorrow, there is much in this report to animate and inspire. We are reminded here of the importance of equipping students to manage change, care for themselves and others, and harness the benefits of technology to produce better outcomes for their clients and themselves.
I commend this outstanding report.
Professor Matthew Harding
Dean, Melbourne Law School
Jackie Rhodes – Managing Director, Asia & Emerging Markets, Thomson Reuters
It is my honour and privilege to present the “2022 Australia: State of the Legal Market Report.” From inflationary pressures to the changing global economy, the latest edition addresses the market forces shaping the sector.
Australian law firms are uniquely positioned on the world stage and maintain a strategic position. These features have stood out in the eight years we have been releasing “Australia: State of the Legal Market Reports.”
Last year’s edition conveyed that pandemic-related pressures triggered a new era of legal market growth. Experiencing demand growth of 2.2% from FY 2020 to FY 2021, the local business of law outpaced their global counterparts. At the same time, average profit as a percentage of revenue grew by 5.3 percentage points.
The “2022 Australia: State of the Legal Market Report” aptly describes FY 2022 as a “tale of two halves”. Demand for legal services rose to 6.4% by the midyear point, before dropping into the negative. Report readers will learn how their peers have met the changing requirements of corporate sectors and grown client relationships.
Legal leaders who seize their moment to drive a culture of digital transformation will inspire the next generation of lawyers.
Another area of focus is the qualities of stand-out lawyers that help make law firms more successful. Considering ongoing legal talent pressures, firms will need to pay close attention to attrition rates. The turnover of legal talent is relatively high in Australia; therefore, firms must assess the flight risk of their top performers as a priority.
The evolving intersection of talent and technology is also a noteworthy trend outlined in the report, as tech can help to attract and retain talent. For firms that increase their investment in legal technology and expand how they use it, engaging with legal talent is key. Legal leaders who seize their moment to drive a culture of digital transformation will inspire the next generation of lawyers.
I would like to thank Thomson Reuters Institute, Barolsky Advisors, and ESPconnect for the unique market research and commentary behind this special report.
Managing Director – Asia & Emerging Markets, Thomson Reuters
A beacon to be tended
Despite the tribulations experienced across the continent since early 2020, the Australian legal industry has shown itself to be quite resilient in the face of near-constant change and steep challenges. For most of the past two years, in fact, law firms in Australia have consistently outperformed their global counterparts.
But as the saying goes, the only constant in life is change.
Over the past few months, the legal world has become awash in uncertainty. Buffeted by inflation, international conflict, and chronic shortages of legal talent, law firms across the world have gone from smooth sailing to facing down yet another storm. The Australian market has been no exception as legal demand shifted from 6.5% growth in the first quarter to 4.4% contraction in the fourth.
What had at one time appeared to be a beacon of inspiration to legal professionals could now be at risk of becoming a cautionary tale instead — an example of what might befall law firms that fail to heed the warning signs and respond to rising threats.
In 1856, a lighthouse was proposed for Jervis Bay in New South Wales. The Cape St. George lighthouse was completed in 1860 but operated for only 30 years before it was decommissioned. In that short timeframe, the lighthouse became rather infamous for causing more problems than it addressed. Some 23 ships wrecked in the area the lighthouse was supposed to protect.
Why? It had been built in the wrong place and the angle of the light was not in accordance with the building plans. By 1917, it was used by the Royal Australian Navy for target practice and destroyed.
Despite turbulent business conditions, the fundamentals of the Australian legal market appear unusually solid, with record rate growth pushing revenue growth to 10.0% for the 2022 financial year (FY 2022), even with slowing demand during the second half of the year. While the rest of the world has been engrossed in an expensive war for talent, Australia has managed to balance keeping its lawyers content with their compensation on one hand, while simultaneously holding their compensation expense growth relatively in check.
As other regions saw their hard-fought profit gains fade, Australia — which did see a slowing from last year — experienced a year-over-year pace that remained extremely stable throughout the course of the year, despite a slide in Q4. Combined, these factors indicate that the Australian legal market has good reason to see itself as a beacon, a guide for how modern large law firms can navigate such crises.
However, even a strong foundation that can hold up against a storm may find itself threatened by other factors. Essential challenges loom for the region, which, if not addressed, could well become unsolvable in the future. Legal talent turnover in Australia is relatively high, with nearly one-third (31.6%) of associates leaving their firm in the past year, more than their counterparts in the United States.
Further, firms are facing key challenges with developing and implementing technology, an aspect of Australian firm operations that is increasingly vital. Finally, Australian partners, one of the cornerstones of law firms, are finding themselves bearing a load that is seemingly heavier every year. These partners are under greater pressure than ever to master an evolving role that is forever emphasising developing technologies and leadership in addition to their role as lawyers.
For the time being, Australian law firms are weathering the storm, but they must take care that other risks — many found outside of their financial foundations — do not undermine them.
 For the purposes of this report, demand is defined as the average total billable hours worked by law firms during a specific period.
 This report uses the Australian fiscal year (FY) and starts on the first of July and ends on the 30th of June. The financial years are designated by the calendar year in which the period ends, so that FY 2022 ends in June of calendar year 2022.
The global overview: A tale of two halves
The 2022 Australian financial year can really be viewed as a tale of two halves
In the first half of FY 2022, which ended December 31, 2021, the average Australian firm in our sample grew demand by 6.4%, an upward trajectory mirrored by many other regions of the globe. Across Australia, demand growth was relatively evenly distributed, both in terms of firm size and geographic region, with the cities of Perth and Brisbane enjoying especially high growth.
However, the numbers since January 1, 2022, have yielded a different tale. Globally, law firms in every region, with the exception of Asia, saw legal demand cool. In a reversal of fortune, Australian firms actually saw their average demand for the latter half of FY 2022 dip into negative territory. This is noteworthy as Australian firms have largely outperformed their average global peers for most of the last five years.
This, however, does not necessarily suggest a gloomy outlook for Australian firms. While U.S. and UK firms maintained positive growth during the same period, they were doing so while being measured against low-demand baselines due to the shortfall of work early in the pandemic. Australian firms, however, did not experience any demand contraction to speak of since the onset of the pandemic and instead have achieved the difficult feat of growth on top of growth, a challenging accomplishment they were able to maintain up until the last six months.
Part of the reason for the continued relative success of Australian law firms is that no single practice has been the sole driver of success. Tax and real estate practices both grew more than 5% this year, with regulatory work notching significant gains of 6.2% as well.
If there was a particularly bright light in FY 2022, it would have to be the record-breaking corporate demand — a result of cheap liquidity in capital markets and government stimulus. All three of the corporate practices tracked — corporate general, mergers and acquisitions, and banking and finance — showed strong growth throughout the year, enough to overcome the contraction experienced by dispute resolution, the largest practice area tracked.
The tale of two halves impacted transactional practices in turn, however. Corporate general demand growth cooled from a high-water mark of 10.6% growth in the first half to a less impressive 2.9% growth in the second half of FY 2022. Mergers and acquisitions (M&A) saw a particularly stark reversal from 19.8% growth in the first half to a 3.1% contraction in the latter half of the year. In fact, by the end of the year, the Australian legal market’s Q4 FY 2022 was on pace for one of the worst quarterly contractions since 2013, buoyed only by continued strength, while fading, in corporate work.
Keys to law firm performance
Despite facing many of the same economic headwinds as the rest of the global legal market, the Australian market’s fundamentals remained surprisingly strong. While demand growth faltered in the latter half of the year, overall FY 2022 demand for services from the average Australian law firm grew by 2.1%, compared to FY 2021. Indeed, the average firm bested its FY 2021 key metrics in every measure except demand and utilisation.
Worked rate growth was especially robust in FY 2022, averaging 6.5% growth compared to just 1.6% last year, the result of partners logging increasingly more hours compared to other fee earners. Simultaneously, capacity constraints within corporate practices allowed firms greater choice in the matters they undertook, allowing them to focus on work with less price sensitivity.
Similarly, as corporate demand growth slowed during the latter half of the year, so too did the rate of growth from these practices which had propelled the market earlier in the year. In response, however, firms adjusted their pricing in other categories to retain their growth rate throughout the year, effectively hedging against inflation. The final result was an average 8.7% increase in fees worked for Australian law firms, a considerable increase over last year.
Law firms also managed to achieve significant improvements in billing realisation, both in terms of realisation against standard rates and against worked rates. Buoyed by these impressive gains in billing realisation for the average lawyer, revenue generation for Australian firms has been extremely strong this year despite the later decline in demand growth.
 Key performance measures define the rate of change from the stated period to the same period 12 months earlier and include values from all fee earners, such as firm-employed qualified fee earners (QFEs) like lawyers, other professional fee earners like paralegals, legal secretaries, etc., and contractors. Demand is defined as total hours worked and worked rates reflect the hourly rate after negotiated discounts from the standard or rack rate. Fees worked are worked rates multiplied by demand. Utilisation is hours worked by all fee earners divided by qualified fee earner full-time equivalents (FTEs). QFE growth is the growth in total qualified fee earner (QFEs).
 Fees worked is a proxy for revenue growth before contingent matters, subsidiary revenue streams, and realisation are taken into account.
Overall revenue growth for the year is up 10.0% over FY 2021 for the average law firm, a near record-setting level of growth. Despite market fundamentals driving strong results for Australian law firms, there remains a concern that rapidly increasing expenses could overshadow these gains, a problem already experienced by many law firms in other regions of the world.
Expenses rise, but profit shines steadily
Perhaps the most-discussed expense item globally has been associate compensation, which has been driven by hefty salary and bonus increases by large American law firms that were mimicked globally. While a potential threat to Australian law firms, which have, on average, lower associate compensation per associate qualified fee earner (QFE) than their American counterparts, they have managed to keep their associate compensation relatively in check and well below the growth pace of firms in the United States.
 Includes all revenue collected by the firm, including components missed in the “fees worked” definition (footnote 4).
An examination of indirect expenses per QFE shows that most expenses remain at similar levels to FY 2020, which is a better baseline to measure from compared to the unusually low spending of FY 2021. Most of the increases in FY 2022 came from staff compensation, office costs, and recruiting expenses, which declined significantly last year before returning to something closer to FY 2020.
Notably, the only reported indirect expense categories above FY 2020 levels are support staff compensation and recruiting, highlighting that the war on talent isn’t just for lawyers but for staff as well. Technology investment per lawyer, while down relative to 2020, would be the next “highest” major category to rebound closer to its previous highs. Occupancy expenses declined for the second year in a row, a possible signal that Australian firms are working to lock in these lower expenses.
Interestingly, firms appear to be moving toward a more “virtual office.” This can be reflected by the early signs of a decline in occupancy spend. A potential trend to look out for is that technology investment may become more of a fixed cost in firms’ balance sheets driven by a move of applications to a cloud-based service as a software (SaaS) environment, which requires yearly subscription model commitments.
While not on the same pace of profit growth as FY 2021, Australian firms — hampered as they were by increasing expenses and softening demand in the latter half of the year — nevertheless managed strong profit growth of 12.6% for FY 2022. While total expenses grew at a faster pace than revenue growth in FY 2022, the sheer size of revenue compared to expenses in firms’ balance sheets allows revenue growth to magnify profit gains; however, this trend would not be sustainable in the long term if they continued unabated.
Despite this, Australian firms are still facing challenges ahead, such as whether weakening demand could create revenue-generation issues in the short term and how to address talent recruitment and retention problems. Much like the structural problems of the Cape St. George lighthouse, neither of these issues is the sort that can be easily addressed by monetary means alone.
Law firm hiring and talent trends
Turnover among lawyers in FY 2022 was high, especially for associates. Roughly one-third (31.6%) of Australian associates left their firm over the past 12 months, compared to less than one-fourth (23.7%) of their counterparts in the U.S. during the same period. This high rate of turnover for associates pulled the all-lawyer turnover average for Australian law firms above 20%.
To get a further perspective into firms’ internal operations, we spoke with Australian lawyers who had been identified by their clients as particular standouts among their outside counsel. These standout lawyers not only anticipate higher associate turnover for the calendar year but more troublingly, also feel less “stuck” to their firms than their peer standout lawyers around the world.
This is not to say that firms are not taking measures to increase retention, especially for this calibre of lawyers. Indeed, Australian stand-out lawyers reported that their firms were providing more development support, and leadership was placing greater importance on lawyer well-being than the average global lawyer was seeing. There was also a greater portion of Australian standouts reporting that their firms were offering increased flexibility for work times and locations.
Yet, many lawyers do not seem satisfied with these measures. Australian stand-out lawyers were significantly less likely to be highly satisfied with their firm’s direction and strategy as well as with the current leadership of the firm, at least compared to the global average. Notably, Australian stand-out lawyers were also less likely to be highly satisfied with the firm’s reputation in the marketplace.
Globally, one of the segments with the highest levels of flight risk is lawyers from diverse backgrounds. Global research from the Thomson Reuters Institute found that female lawyers or those from under-represented demographics — as well as those who identified as LGBTQ+ — were the most likely to leave their current firms. For firms already struggling to hire and retain diverse lawyers, a retention crisis, in general, will only make these lawyers more likely to leave.
Australian firms may be especially susceptible to this weakness, as their lawyers from diverse backgrounds gave notably lower-than-average marks in both their own well-being and their leadership demonstrating the importance of diversity, equity, and inclusion (DEI) as compared to lawyers with non-diverse backgrounds.
This may be because the stand-out lawyers gave noticeably lower scores on how leadership should focus on demonstrating their commitment to DEI when it relates to retention efforts. While diversity efforts could very well be in place, there may be a disconnect between how Australian firms’ lawyers believe those DEI resources should be used and how effective it has been with diverse staff.
For the moment, Australian firms appear to be managing this potential talent crisis even as signs of trouble remain. Replenishment rates for associates in FY 2022 remained above 1.0, a positive sign. Replenishment for senior associates, while trending upward in direction, remains below 1.0. As a result, the overall pool of senior associates is shrinking as the pace of replacement continues to fall behind that of attrition. At the same time, firms are increasing the replenishment of non-equity partners (NEP) even as replenishment for equity partners remains relatively low, with almost two non-equity partners joining firms for each one that retires.
 Thomson Reuters Institute “Law Firms Competing for Talent in 2022: Will lawyers stay or will they go?” 2022; available at https://www.thomsonreuters.com/en/reports/law-firms-competing-for-talent-in-2022.html.
 For the purposes of this report, replenishment is the ratio of lawyers (QFEs) who joined the firm compared/divided by the number of lawyers (QFEs) who left the firm over the past 12 months. A replenishment of 1.0 represents a ratio of 1:1.
 NEP partners had the highest replenishment rates for any title at 1.88. This replenishment ratio means that for every ten NEP leaving the firm, almost 19 are promoted to replace them.
For associates looking for career advancement, these statistics combined give the impression that ascension into the upper ranks of the law firm is becoming more difficult and that reaching the pinnacle of equity partnership is even more so. Given that many associates today may not aspire to the ranks of equity partnership, this may not pose too great a threat. However, firms would be well cautioned that a demonstrated lack of career progression can be a major factor that drives associates’ decisions to leave their current law firms.
Perhaps some of these talent challenges that Australian law firms are currently facing can be mitigated through greater adoption of technology and an increased focus on creating a culture of innovation within the firm. Technological advances themselves are now routinely requiring firms to innovate and train their lawyers in new skills at a rate that was previously unheard of. Lawyers today require tech skills beyond practicing law to merely stay competitive with their peers.
Bringing in new partners who may be more familiar with these types of technological operations may be a boon as well. This will not be an easy transition, however, and if firms fail to adapt, they may find their bright future increasingly threatened.
Legal innovation and technology trends
As innovation initiatives and legal technology investment increase among Australian law firms, their lawyers are seeing the need to upgrade their skills for the future
A recent analysis by Eric Chin of PwC NewLaw found that “half of Australia’s top law firms have made formal commitments to legal innovation, a seven-fold rise since 2015.” So, what’s really driving this law firm investment in legal innovation and technology — and where is it headed?
Of course, the pandemic has caused a focused emphasis on technology among law firms. However, this technology investment has been long in the making. After a brief year of flat growth in FY 2021, firms grew technology investment by 5.3% in FY 2022, an increase in line with the rapid growth over most of the past five years. Further, 59% of firms have invested significantly or moderately in technology, according to the Thomson Reuters Tech & the Law 2022 Survey. Yet, when you peel back the layers of digital maturity in law firms, current innovation and technology investment is no longer just about the response to the pandemic or driving client value through improved efficiencies.
 Rowbotham, Jill. “Lawyers get the message: innovate or slide back,” The Australian, 8 June 2022. Business section.
 Thomson Reuters “Tech & the Law 2022 Survey”; available at https://insight.thomsonreuters.com.au/legal/resources/resource/tech-the-law-2022-report.
How innovation is driving lawyer retention
A thriving innovation practice is now a significant element in the lawyer retention equation. According to the Tech and the Law 2022 Survey, 29% of lawyers said they would be prepared to leave their firm or legal practice for a more innovative firm, while another 32% said they were unsure.
With lawyer turnover rising significantly and almost half of lawyers posing a flight risk within the next two years, innovation and technology provide a great opportunity to assist in retaining those lawyers.
 46% of associates reported that they were unsure to highly likely to leave their firms in the next two years. Source: Thomson Reuters 2022.
Digital literacy in the next generation of law practice
Millennials — those aged 25 to 39 — and younger lawyers are digital natives who have much less tolerance for mundane, repetitive work that can be automated. Using technology at work to be more efficient and solve client problems is in their DNA — it’s not scary or difficult, it’s expected.
As the proportion of millennials just overtook that of baby boomers — aged 55 to 74 — in Australia, law practices will be under increasing pressure to continue responding to the demands of this younger generation, according to the recently released 2021 Australian Census results.
By improving the lawyer experience, innovation and technology will continue to play a key role in attracting and retaining current and future talent. Thus, upskilling lawyers for the changing way law is practiced due to globalisation and technological advancement is critical. Digital literacy is fast becoming a core skill for lawyers.
Some firms have innovation hours targets for their lawyers, in addition to their normal billable hour targets. A reasonably new initiative by some firms is seconding or rotating traditional practicing lawyers through innovation teams to grow and hone their digital skills. Other firms are developing extensive digital education and accreditation programs for lawyers. In addition, new roles for lawyers are emerging to work with innovation teams as “content creators” to develop products for clients.
Law schools in Australia also are increasing their legal tech initiatives to upskill future lawyers with legal tech clinics, competitions, degrees, and partnerships. Some interesting examples include:
- University of Technology Sydney (UTS) Law School’s Legal Futures and Technology major
- BotL, a student-led initiative to prepare law students for the future of legal practice through exposure to legal technology in clinics and competitions, is working with UTS, Monash, and Melbourne University Law Schools and is supported by law firms Lander & Rogers, Maddocks, KWM, and legal tech companies Josef and Checkbox
- Neota’s legal tech challenges for access to justice in partnership with Australian university law schools include UTS, Melbourne University, and University of Western Sydney — with support from law firms Allens and Herbert Smith Freehills
This increasing emphasis on legal technology and innovation has created a very competitive landscape for legal technology and innovation talent, where attracting and retaining these multidisciplinary professionals with a different career trajectory to traditional lawyers is challenging. Some law firms are even starting graduate programs for legal technology and innovation teams.
 Australia Bureau of Statistics, 2021 Census shows Millennials overtaking Boomers; media release, June 28, 2022; available at: https://www.abs.gov.au/media-centre/media-releases/2021-census-shows-millennials-overtaking-boomers.
How corporate clients are managing their law departments
Pinched by increasing mandates and tightening budgets, corporate law departments are looking to technology and their outside legal counsel for help
According to Thomson Reuters’ recently released “2022 State of Corporate Law Departments” report, “recent years have seen a steep rise in the proportion of law departments using metrics-driven approaches to managing their departments, with 90% of departments saying they are employing some form of metrics last year, compared to 75% that said this in 2015.”
As corporate law departments are being squeezed by growing demands and tight budgets, the use of these metrics becomes even more critical. Not surprisingly, efficiency was ranked second behind spend as the most important metric for law departments to track, according to the report. Of the efficiency priorities and challenges that corporate law departments are likely to face in the coming 12 months, digitalisation/technology and operational efficiency/processes were listed among the top three.
Some legal service clients in Australia are opting for separate alternative legal services panels in addition to their traditional legal services panels that are composed mostly of law firms. Another noteworthy trend is that corporate law departments are looking to leverage existing in-house technologies to gain more easily obtained benefits. This is partly due to the very long lead times needed to obtain approval for new technologies due to the extensive cybersecurity compliance requirements among most corporate clients.
Interestingly, responses from law firms to these challenges faced by their clients have been diverse. Some are assisting their clients with the development of digital transformation strategies, while others are selling technology services directly to clients with no partner involvement. Other law firms are starting to deliver legal services in new ways through the development of legal products, which are often sold as a subscription service.
Additional challenges in these early days include developing multidisciplinary teams and new business models. Yet, for those law firms that can tackle the cultural challenges of building their own in-house alternative service offerings, significant opportunities exist for new revenue streams.
Technology investment on the corporate side
Influenced by growing participation in the Corporate Legal Operations Consortium (CLOC), Australian corporate law departments are starting to spend more on digital transformation and legal operations. Focus on technology investment has been high at law firms, with 59% of respondents reporting investing heavily or moderately in legal tech over the last two years, while corporate law departments have been close behind, with 41% of corporations surveyed noting that they are investing significantly or moderately.
 Thomson Reuters Institute “2022 State of Corporate Law Departments Report”; available at https://www.thomsonreuters.com/en-us/posts/legal/state-of-corporate-law-departments-2022.
 Id; at pg 17.
 Id. at pg 21.
As both law firms and corporate law departments in Australia adopt hybrid working models post pandemic, they are investing heavily in cybersecurity and collaboration platforms, with video conferencing now having ubiquitous deployment. With the rise of cybersecurity threats, information governance is also growing as a key investment area. Both are placing a high priority on leveraging existing technology effectively to maximise their return on investment. As a result, overall integration and interoperability of products is also a priority.
When comparing technology usage surveys from law firms and corporate law departments, both favoured legal research tools and document automation. Law firms also favour know-how and precedent solutions, while corporate law departments favour dashboard and compliance solutions.
Selecting the right technology to both address the problem and fit into an organisation’s culture is a key first step to a successful tech deployment, but that also comes with its own challenges. Of the corporate law departments surveyed, one in four said they had experienced a failed legal technology implementation project and more than half (53%) of those failed projects were due to the technology ultimately being the wrong fit.
Law firms have significant opportunities to assist their clients in the legal technology adoption journey and many firms already have innovation, legal technology, or legal operations teams that are partnering with clients to co-create solutions. For some firms, however, technology deployment is still more marketing than delivery, and they may be left behind as their clients’ digital transformation agenda grows.
Tech adoption challenges for both law firms and their clients
While much progress has been made over the last seven years, law firms are on a journey to drive higher lawyer technology adoption rates across the entire firm, not just with specialist groups or with the early adopters.
In considering adoption challenges, one interesting finding is that Australian stand-out lawyers had much lower satisfaction scores with their firms’ IT, innovation, and knowledge management teams compared to the global and U.S. averages.
Another adoption challenge is how to make partners feel more comfortable using technology in their daily practice without losing a sense of control.
 Thomson Reuters’ Tech & the Law 2022 Survey.
Innovation adoption checklist
Overall, successful innovation and technology adoption is much more about the people and processes than the technology itself. Taking a people-first approach in order to shift mindsets through collaboration and challenge the status quo can pay dividends relatively quickly. Some steps to consider include:
- Understand what your clients want and the problem they are really trying to solve.
- Find out what motivates and engages your lawyers to drive internal adoption.
- Embed innovation in practice groups and focus on adding value for clients.
- Determine what additional capabilities lawyers need and help them develop these skills and capabilities; agility, adaptability, flexibility, and curiosity are key.
- Motivate multidisciplinary teams to work together through creative collaboration and client-first reward and recognition structures. Connect, communicate, and collaborate with your teams and clients.
- Invest in your people and processes, not just the technology.
- Consider how your organisation’s reward structures need to adjust to accommodate new ways of working to foster innovation.
If firms or law departments want to become a beacon of innovation, they will now need to provide greater opportunities for lawyers to come on board and discover how they can motivate their teams to embrace technological development. In doing so, they must be prepared for significant changes in the workplace environment, as the rate of technological change continues to accelerate and is likely only to bring greater challenges with it.
The technological change that will occur in the near future is often overestimated, but in the long term is often underestimated. Determining the impact that technology will have on the legal industry in the next five to 10 years is difficult, but it appears firms are no longer at the beginning of the adoption curve and may be heading towards significant change.
The changing demands on law firm partners
As firms embrace new technologies and ways of doing business, they may need to also take care of a core part of their business that has existed since the beginning: their partners
At the start of the COVID-19 pandemic, many firms recorded a significant jump in partner billable hours relative to other fee earners. Clients demanded more direct access to partners to address their most pressing issues. Further, remote working made delegation to less-experienced team members more clunky and partners were keen not to overburden their at-capacity senior associates.
As one partner commented, “When that urgent client matter arrived on my desk after a busy week, I found it really hard to ask my exhausted associates to work on it. What typically happened was that I took it home and did it all myself.”
After nine full quarters since the start of the pandemic, one might have expected things to have returned to a more “normal” state with law firms once again making greater use of their leverage to push work down the chain and off partners’ plates. However, evidence is to the contrary.
Not only have partners been billing more, but they’ve also had to spend a greater proportion of their time recruiting new staff — greatly adding to their time pressure. With every new person that joins the team, there is usually a significant amount of time spent on job scoping, candidate interviews, selection, remuneration package negotiation, onboarding, and team integration. While recruiters and other staff may do most of the heavy lifting, partners are still actively involved in many steps of this process.
Increased billables and time in recruitment have contributed to lower well-being satisfaction measures cited by Australia-based stand-out lawyers — 91% of whom are partners. While they may have appreciated the additional income, other indicators of job satisfaction are lower than their counterparts elsewhere.
More demands on partners
Partners in law firms essentially have four roles: producer, manager, leader, and owner.
Demands on partner time are likely to increase in a number of ways, including:
|Role||What will increasingly take up more partner time?|
This four-role partner business model will continue to succeed in the long term only if the partner role is balanced, healthy, and sustainable. There is a risk that the job, as it’s currently designed, will become less viable in the near future, especially considering that the starting point at the end of FY 2022 was one of record high utilisation and relatively low well-being numbers.
The key for many firms is to go back to foundational management theory, which states that structure should follow strategy. By strategy, we mean clarity of aspirations, market focus, and competitive edge; by structure, we mean roles, relationships, resources, capacity, and operating systems.
Every firm should be re-examining strategy at the practice-team level and making sure the team structure is balanced and aligned. For example, having double-digit growth aspirations with a team of partners and associates that’s already at capacity simply won’t work over the long term. The team may enjoy short-term financial success, but over the long term there is a very high risk of burnout, high turnover, and poor morale.
Many law firms are trying to deal with increased demands and role complexity by providing their partners with leadership coaching and training. This may help to a point, but even highly competent team leaders will fail if there are major strategic and structural flaws in the design of their practice.
In sum, law firms must carefully evaluate where they stand today and be honest about whether their current position is tenable in the long term. Failure to recognise or address foundational issues for the sake of protecting short-term gains risks sacrificing long-term “must-have” items.
 A five-generation team is one with a diverse age profile, including members of the following generations: Founders, Boomers, Gen X, Gen Y, and Gen Z.
As we’ve mentioned, the Cape St. George lighthouse didn’t fail because it wasn’t needed or because it wasn’t doing its job properly. It failed because, fundamentally, it was pointed in the wrong direction. No amount of money could fix the simple fact that it had been built in the wrong place. As a result, it created more problems than it solved.
The legal industry in Australia does not face the same sort of existential crisis today but, like that lighthouse, individual firms might find themselves with an incorrect focus or out of position to address the problems they need to confront now and in the near future.
Law firms may well find themselves burdened by softening demand or increased pressure on rates. Expenses will continue to rise, owing to both continued pandemic recovery and the effects of inflationary pressures. Law firm leaders will have to adapt to the shifting demands of their workforce, both in terms of generational differences and the rise of hybrid work. This will, in turn, increase the pressure on firms’ partners as they seek to balance the fourfold demands of their role within their law firms.
However, there are ample reasons for continued optimism. A renewed focus on the correct technology to better address the challenges firms are facing may help alleviate the strain of more mundane tasks. Creating a culture of innovation can endear law firms to their clients while simultaneously creating an engaging, exciting environment full of opportunities where lawyers want to work, mitigating at least some of the pressures associated with finding and keeping talent.
All of this experience can also push law firms to provide greater service to their clients by leveraging the expertise the firm develops to advise clients on the best course of action to improve their own businesses and operations while helping clients attain their goal of improved efficiency.
The Cape St. George lighthouse was doomed when its foundations were laid down. The good news for these law firms is, unlike a lighthouse, they are not tied to a foundation set in stone. For some, their foundational elements may be incorrect at the present time, or at least ill-prepared to face what comes next, but with the benefit of an informed, honest approach to strategy, these shortcomings can be addressed, making the firm a beacon that can help navigate today’s choppy waters.
Thomson Reuters Institute
Senior Industry Analyst
Senior Manager – Enterprise Content
Thomson Reuters Institute
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Barolsky Advisors is a leading management consulting firm in Australia with a deep understanding of law, accounting, engineering, and business advisory firms. The firm specialises in helping managing partners, boards, and practice team leaders with strategy formulation and implementation. Founder Joel Barolsky is a Principal of Edge International, a monthly contributor to the “Australian Financial Review” legal affairs section, and a Senior Fellow of the Melbourne Law School.
Visit barolskyadvisors.com for more information.
ESPconnect, a leading legal technology and innovation consulting business, works with clients across the legal ecosystem to develop digital transformation strategies and achieve successful implementations by creating a collaborative culture between multidisciplinary teams of lawyers and technologists. The traditional risk-averse culture in law is often in opposition to the experimental, agile nature of technology and innovation, making strategic decisions and execution more difficult. ESPconnect Founder and Director Beth Patterson has a deep understanding of this culture. She is also an Adjunct Professor in the University of Sydney Faculty of Law and was formerly the Applied Legal Technology Director at Allens.