.. But Australian Law Firms Less Productive, More Expensive

The 2023 Australia: State of the Legal Market Report, released by Thomson Reuters, provides a comprehensive overview of the legal landscape in Australia, noting a recovery from a tough year, but some issues law firms need to face also.

The key takeaways from the report are as follows:

Resilience Amid Challenges: Australian law firms exhibited resilience in the face of challenges, such as softening demand and rising expenses. Despite a decline in demand during the first half of FY 2023, a 6% surge in demand during the second half offset these losses, resulting in an average demand growth of 1.3% year-on-year.
Counter-Cyclical Practices: Counter-cyclical practices, including dispute resolution, insurance coverage, insurance defense, workplace relations, and insolvency & restructuring, played a pivotal role in the recovery of law firms in FY 2023. These practices accounted for one-third of all hours logged and saw significant growth, contributing to a positive outlook.
Cost Expansion: Rising costs, both direct and indirect expenses, outpaced revenue growth, posing a challenge to profitability. Direct expenses increased due to headcount growth and talent becoming more expensive. Indirect expenses for support functions and infrastructure also experienced significant inflation-driven cost increases.
Decline in Productivity: The report indicated that lawyers in Australian firms have become more expensive and less productive, with hours worked per lawyer and profit per lawyer decreasing. This suggests that headcount increases have outpaced demand growth.
Profitability Challenges: With expenses growing faster than demand, the average profits per equity partner (PPEP) contracted for the first time since FY 2016, declining by 3.1% over the past twelve months. However, there are indications of a positive trend, with recent demand growth and slowing expenses potentially leading to recovery.
Lawyer Discontent: Australian lawyers expressed dissatisfaction with certain aspects of their firms compared to global peers. Their net promoter score was lower than the global average, indicating some discontent. Moreover, a notable percentage of Australian lawyers showed a reluctance to leave their current firms, suggesting potential resistance to aggressive firm decisions.
Generative AI Impact: The report outlined three possible scenarios for how generative AI might impact the legal industry: The High Road, where generative AI enhances client value and maintains or increases margins; The Low Road, where AI adoption forces firms to reduce costs due to changing client relationships; and The No Road, where AI has limited strategic impact. Preparing for the influence of generative AI is recommended, as its effects on the legal industry are still unfolding.

The report highlights the resilience of Australian law firms in overcoming challenges in FY 2023, the importance of counter-cyclical practices in their recovery, and the need to address rising expenses and declining productivity.

The report also underscores the potential impact of generative AI and the importance of addressing lawyer discontent in shaping the future of the legal market in Australia.

For more detailed insights, you can download the full 2023 Australia: State of the Legal Market Report here.