Legal industry healthy and growing but competition intensifies

Resilience in the legal services industry bodes well, with revenue holding above $25bn, but competition for talent and market share remains fierce.

Demand on law firms from the financial services sector rose in the wake of the banking royal commission. Picture: AAP

The legal services industry will exceed $30bn in revenue by 2026-27, up 13.4 per cent from $26.8bn in the current financial year – but average annual growth will dip from 2.8 per cent to 2.5 per cent.

While the industry felt some of the pain of the economic disruption of the Covid-19 pandemic in 2019 and 2020, revenue was maintained above $25bn and rebounded within a year, according to the research company IBISWorld.

Its latest report, compiled from government and industry data, says the sector is now set for increasing competition both locally and from overseas players entering the Australian market, following in the footsteps of firms such as US-based White & Case and UK-based Kennedys Law.

Profit growth of 2.6 per cent annually over the past five years should produce an $8.5bn figure this year, but profit margins were squeezed – down by 0.4 of a percentage point on average each year and expected to be 31.8 per cent for this year.

IBISWorld industry analyst Victoria Baikie said Covid-related factors such as volatile business confidence had hit profitability.

“Another driver now and in the future will be more people entering the industry and people from large companies, such as partners, leaving to start their own companies,” Ms Baikie said.

“That’s going to drive down prices as they try and obtain clients from each other.”

Ms Baikie said revenue growth and profit margins had also been affected by the need to compete for lawyers with other employers. This included government as well as the large accounting firms and private companies adding legal services to their businesses or expanding their in-house legal teams. However larger firms are fighting fire with fire, integrating advisory and legal services. They are also expanding their operations overseas.

The survey, which excludes in-house legal teams but takes in the full array of law, from criminal to commercial, reveals the legal services industry now has 23,349 businesses employing 107,000 people, with a $7.8bn wages bill. The number of enterprises and employees is expected to grow by more than 2 per cent annually in the next five years, and the wages bill by 2.8 per cent.

Wage cuts and freezes during the first year of the pandemic were an overreaction and have been largely reversed or compensated for since. However, the pivot to work from home encouraged firms to seek rental cost reductions or downsize their premises.

Conditions vary widely within the sector. The six largest firms – Herbert Smith Freehills, Allens, Ashurst Australia, Clayton Utz, King & Wood Mallesons and MinterEllison – attract 15.1 per cent of the revenue, in contrast to 98 per cent of enterprises that employ fewer than 20 people or are sole traders.

Commercial law dominates, accounting for 33.1 per cent of services provided, followed by personal legal and industrial relations (21.6 per cent), administrative, constitutional and other law services (17.2 per cent), property (13.2 per cent), community legal services (7 per cent), intellectual property law (4.8 per cent) and criminal law (3.1 per cent).

Covid-19 affected some sectors more than others; for example, while property services were affected by significant falls, demand from the financial services sector rose in the wake of the banking royal commission.

Market uncertainty drove the demand for merger and acquisition services down in 2019-20 but this has rebounded, and housing transfers are expected to show an increase this year.

There was limited demand for countercyclical services such as bankruptcy, because of support programs including JobKeeper. Insolvency and restructuring services are expected to show a sharp rise in the two years to June.