Low demand continues to hit growth: law firms face weak demand, increased competition

LAW firms face sustained low growth due to weak demand for legal services, increased competition and cost-conscious clients.

Legal services, past and future activity.

THE nation’s law firms are set for a period of sustained low growth because of weak demand for legal services, increased competition and entrenched cost-consciousness among corporate clients.

Revenue for the legal services industry is set to grow by 2.7 per cent this financial year before settling back to a compound annual rate of 2.4 per cent across the five years to 2019-20.

This outlook, which has been identified by industry analyst IBISWorld, is a sharp improvement from the aftermath of the global financial crisis when legal sector revenue declined by 1.9 per cent and 1.2 per cent in 2008-09 and 2009-10.

However, IBISWorld senior industry analyst Stephen Gargano said the improved outlook still amounted to relatively low growth and was evidence of the maturity of the industry.

“The industry is not going backwards but it is not impressive growth,” Mr Gargano said.

“This affects a lot of professional services areas; companies are taking a lot more note of what they are paying and commercial law is a very large proportion of the industry.

“When that portion of industry starts pulling money away from the industry it is definitely going to have a significant effect.

“We expect companies to be relatively cautious in their spending over the next five years and that is going to affect the legal services industry,” Mr Gargano said.

IBISWorld’s September report on legal services says the Australian industry is in the mature stage of its economic life cycle, “characterised by slowing growth as ­market saturation is reached, ­rising activity in major mergers and acquisitions, improving operating efficiencies and wholehearted market acceptance of products and services”.

However, this relatively low rate of growth is expected to lift legal sector revenue from $21.4 billion this year to $24.1bn in 2019-20, up 12.6 per cent.

The industry’s wages bill in the same period is expected to grow by 10.4 per cent — from $9.6bn to $10.6bn — while legal sector employment is expected to grow by 6 per cent, from 101,049 to 107,110.

The five-year outlook is a major improvement on 2012-13 when the report says legal sector revenue declined by 0.1 per cent because of weak business confidence and a slowdown in private capital expenditure.

The report says the best year will be 2016-17, when revenue is expected to grow by 4.4 per cent — just short of the 4.6 per cent of 2007-08 on the eve of the GFC.

It says the “lacklustre demand” for legal services in Australlia caused many big firms to seek international mergers and alli­ances to gain access to opportunities for growth overseas.

The report notes the international links of Herbert Smith Freehills, Allens, Ashurst, and King & Wood Mallesons and says IBISWorld projects solid growth for all four firms in 2014-15.

Mr Gargano said the sector was expected to do whatever it could to prop up revenue.

Major firms were looking to maintain profits for partners by cutting staff, freezing pay and ­ensuring their cost base was as low as possible.

The report says law firm profit margins are expected to begin approaching pre-GFC levels but this is likely to be achieved through better management, not growth.

Wages are expected to rise across the next five years but are likely to fall marginally as a proportion of revenue because of the greater focus on cost reduction, the report says.

Three practice areas are expected to dominate the improvement in revenue: commercial law, which is expected to bring in 31 per cent of industry revenue; personal legal services, on 22 per cent; and property law, on 19 per cent.

For the sector, the report predicts “solid” growth this year as transactional work and mergers and acquisitions begin to improve and the impact of job cuts begins to take effect.

During the next five years, it says, transactional work is likely to rebound as businesses become more inclined to take risks.

Niche and speciality areas of law are expected to remain in demand as clients seek specialised assistance to expand their businesses cost-effectively, the report says.

While law firms dominate the legal services industry, the IBISWorld report covers legal services provided by solicitors, barristers, patent attorneys and legal aid offices.