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 DEMANDS AND OPPORTUNITIES FOR LAW FIRMS IN 2007
Neil Oakes takes a snapshot of the legal market place 2006 from the findings of the 2006 Law Firm Performance Benchmarks. He also looks at the opportunities available for lawyers to enhance their performance.
Profits up for performers
2006 has been a strong growth year for the top performing firms. The average profit of this year’s group of elite practices (the top profit practices) has increased from $575,188 per principal to $696,616 per principal. Driving these higher profits was an 11% increase in practice income.
For many other firms, however, 2006 has been a challenging year. The group of least profitable practices experienced no real growth in practice income (growth was less than CPI) and suffered an average 21% drop in profit per principal.
Snapshot of practice areas
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Property work remains flat in all but a few locations. Queensland, particularly coastal Queensland, remains strong with little indication of a slow down. Regional Victoria remains steady at the top end but quiet in the mid-price range. NSW remains relatively quiet. |
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WorkChoices is impacting on IR activity. Wrongful termination work has all but dried up. Good performers in this specialty are turning their attention to OH&S systems consulting and some of the preventative aspects of employee relations negotiations. |
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PI activity is gravitating around branded firms that are seen as specialists. There seems to be a decreasing number of firms dealing with a decreasing number of larger claims. In such firms profit margins remain high. Regional firms that have maintained strong union or key referrer relationships continue to do well. |
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Family law has emerged as a significant profit centre. Firms capable of communicating ability in this area are doing well. The ever increasing tiers of complexity in an average family law matter provide opportunities for specialists in this area to excel. The most significant change that we have seen in the last 10 years in the area of family law, is the value of the average family asset base. This is likely to increase as the wealth of middle Australia increases. |
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Commercial and business work (litigation and transactional) is trending with local economies. Regional centres and growth suburbs are busy at the moment. Depressed areas are quiet. Small to medium enterprise activity in suburban Sydney seems to be gravitating to the CBD or to larger local firms with a strong commercial brand (size, partner profile and physical presence). |
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Estate planning activity is patchy. This area has not become the great revenue generator that many had hoped although some lawyers with strong links to leading local accountants are doing well. Not surprisingly, success in this area is directly proportionate to the concentration of wealthy clients in one’s local population. Estate litigation is likely to be a major profit centre during the next 10 – 15 years as estates become more valuable with the escalating wealth base of average Australian families, and more complex, with the increasing complexity of family relationships. |
Opportunities for law firms
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1. Life balance versus performance ethic
Motivating young lawyers to perform at best practice levels is a function of engagement. Modern employees will only work well if they want too. They need to be engaged by the matters that they are working on and the talent that they are working with, all the while maintaining a healthy work life balance. In short, get ready to pay more for less! |
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2. Generational skill sets
The management and motivation of talent will become a significant differentiator. Good firms will always earn solid profits beyond partner salaries through staff leverage. Attracting talent, retaining and compensating them won’t get easier.
Partners wishing to maintain success need to learn and practise new leadership skills, not the ones that they learned by being mistreated themselves. The old “it was good enough for us, it will do for them” approach won’t work with talented employees. |
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3. The boutique emerges as the norm
Clients want specialists, even in commodity areas. Having made a decision not to be a large, general service firm the question begs, “What do you want to be?”
I think that we will see a growing number of top profit firms being quite boutique. Within five years boutique providers will, most likely, make up the entire top quartile of the high-profit sample population in all FMRC Legal performance surveys. These firms will out-perform the generalists in many areas, most critically in client quality and talent attraction. |
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4. Good firms combat commoditisation with client intimacy
As clients become more sophisticated, perceived value is becoming more important than brand. Know and like your clients, become an expert in your client’s industry, their staff, suppliers and customers. Visit clients regularly and develop a keen awareness of the needs and wants of all critical individuals. It really isn’t that hard. It is currently a differentiator but will emerge as the norm.
The mid-tier firms of the Australian profession have experienced excitingly rapid growth in total fees billed and profit in the last two years. Much of this growth has come at the expense of the top tier firms. Another symptom is price fatigue. As a result we have seen the growth of in-sourcing of legal work by significant corporate clients. It is only a matter of time until smaller corporate firms and small to medium-sized enterprises catch the bug. |
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5. New ownership and wealth building opportunities
There are many reasons why modern firms should explore incorporation. By 2010 many successful legal firms will have diverse ownership. The value placed on these firms will be a function of profitability, systems and management quality, and to an extent client quality. |
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6. Knowledge management a major differentiator
Maintaining a high performance culture, quality and steep learning curves is all about the effective management of knowledge. Smaller and mid-sized legal firms are starting to manage this better.
Good knowledge management is much more than a technology challenge. To work well it must be cultural. Partners and senior lawyers must embrace knowledge-sharing and owners must be prepared to see learning and lawyer skill building as an opportunity not an expense. |
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7. Flexible working arrangements retain talented individuals
Our analysis of the composition of solicitors in NSW confirms an increase in the number of women in the profession: The necessity to introduce more flexible working arrangements to retain talented individuals is likely to see the trend toward women dominating the profession gain momentum.
By 2010, firm size (lawyer numbers and gross fees billed) will be less important to the maintenance of profitability than flexibility, quality, leadership and client intimacy. Good firms should ready themselves now. |
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