Law firms brace for prospect of short-term downturn

The gloss has gone off the short-term outlook for the ­nation’s law firms due to tough competition and falling demand.

The gloss has gone off the short-term business outlook for the ­nation’s law firms due to tough competition and falling demand for legal services.

A net 24 per cent of law firms say current business conditions are negative — a slight deterioration from February when just 18 per cent believed conditions were negative.

But while law firms are more cautious about their prospects, they believe revenue will rise in 14 out of 15 practice areas with energy and resources the exception.

The firms are more confident about the prospects for the national economy. Just 13 per cent had a negative outlook for the economy compared with 18 per cent six months ago.

But that confidence is concentrated in the mid-tier firms.

About one in five mid-tier firms predict the economy will perform well in the year ahead. In contrast, the previously confident top-tier firms have become more pessimistic with just 9 per cent expressing a confident view, down from 33 per cent six months ago.

These are the key findings from the Commonwealth Bank’s latest Legal Market Pulse survey which has been conducted by Beaton Research + Consulting.

While short-term confidence has dipped, this followed the dramatic improvement in the previous survey when the proportion of law firms that believed business conditions were negative halved.

The survey, which covers 50 leading firms, also shows that top-tier practices are anticipating an average growth in profits of 2.4 per cent, while the mid-tiers have forecast a more modest rise of 1.6 per cent. But the top-tier firms believe they will be able to increase profit per equity partner by 3.4 per cent — which is higher than the overall expected rise in profit.

This, according to the survey, could reflect the benefits of efficiency measures that are helping the top-tiers maintain margins.

The survey says international practices are facing constrained growth in Europe and North America as well as political and economic uncertainty. Alongside these short-term cyclical issues it found that law firms were increasingly being ­confronted by larger structural changes.

“Demand for external legal services continues to fall as cost-conscious corporate clients bring more matters in-house or turn to technological and outsourcing ­solutions to manage matters ­traditionally handled by their external legal advisers,” the survey says.

The Commonwealth Bank’s Marc Totaro says the survey also shows that law firms are adapting to a more challenging business environment by making greater use of technology.

“There is a lot more focus on technology in particular to become more efficient and effective given the revenue pressure,” said Mr Totaro, the bank’s national manager of professional services.

However, he said technology, including artificial intelligence, was also being used by some firms to disrupt the established structure of the market for legal services.

He believed the survey results indicated that the leading firms had accepted the need for change and that there would be no going back to traditional ways of doing business.

“The good old times are not ­returning any time soon,” Mr ­Totaro said.