"Extraordinarily dangerous position": Legal industry in recession

“Extraordinarily dangerous position”: Legal industry in recession

The largest decreases in demand were in the three largest legal areas — dispute resolution or litigation (down 11 percent), banking and finance (down 9 percent), and mergers and acquisitions (down 18 percent).

Last year’s wage spiral, which forced most law firms to raise salaries by at least 10 percent, pushed up spending by an average of 12.1 percent for the Big Eight and 8 percent for the rest. This has put upward pressure on rates, with the report stating that standard rates have risen by around $50 per hour to an average of just over $600 per hour for all raters.

Law firm heads declined to comment on the report, citing the confidentiality to which they are bound as participants and clients.

The optimism is fading

However, the deteriorating outlook is reflected in the responses for the forthcoming Law Partnership Survey, with most companies abandoning the cautious optimism they expressed mid-year.

tea financial report The Optimism Index – which asks law firms to rate their opinion on the market outlook – fell to 3.8 from 4.2 from 5, with many citing economic headwinds from rising inflation and interest rates.

Law firm chiefs have also watched the US legal market with concern, as many of the country’s largest firms are now conducting mass layoffs – usually via employee performance reviews – to correct “overhiring” during the long boom of 2019-21.

Bruce Cooper, chief executive partner at Clayton Utz, said he feared the local economy and legal sector would be led by the US and Europe.

“I’ve never seen the outlook change as quickly as it has in the last four months,” Mr Cooper said in a survey response.

Clayton Utz’s Bruce Cooper says law firms face ‘revenue challenges’ Rhett Wyman

“For GFC, the shock of 2008 was sudden and steep, but from early 2007 the world slowed as major markets began to cool in anticipation. The change in current market sentiment is comparatively more sudden…

“The biggest concern for any of us will be the revenue challenges as last year’s stalled spending cost inflation – mainly wage increases – puts pressure on profitability.”

Adrian Tembel, chief executive partner at Thomson Geer, emailed his staff this week that the outlook for the legal sector was “sobering”.

Structural change: Thomson Geer CEO Adrian Tembel. James Brickwood

“The definition of a recession favored by most economic commentators and the media is two consecutive quarters of negative real gross domestic product (GDP) growth. If the legal sector were the economy then we would be in a tech recession but we don’t necessarily describe it that way…

“It is clear that a structural change is taking place in our industry. This is exactly what we would expect in an inflationary environment of rising interest rates and falling asset prices…

“Conclusion: The ‘COVID boom’ is over!”

The Peer Monitor report provided commentary on two sectors – the Big Eight and the big law firms – as well as data for all firms.

“Both the Big Eight and the big corporations saw a drop in demand this quarter along with slowing rate growth, resulting in the worst quarterly fee cut in the program’s history,” the report reads.

“Every segment saw double-digit occupancy declines, with the big eight surpassing last quarter’s low and posting their largest quarterly decline since at least 2014.

“Expenditure rose at historically high levels which, combined with flat earnings, puts Australian firms in an exceptionally dangerous position to start the year.”

Mention was made, however, of the companies that made up the Big Eight – Minter-Ellison, Herbert Smith Freehills, Allens, King & Wood Mallesons, Clayton Utz, Corrs Chambers Westgarth, Norton Rose Fulbright and Ashurst – came off record highs.

“Usage has declined by double digits compared to the first quarter of 2022, with employees logging the fewest hours in recent history. Consolation can be found in the fact that compared to pre-pandemic times (Q1 FY 2020), companies are still generating 14.5 percent more revenue…

“Dangerous Path”

“All of this is on top of rapidly increasing spending, with direct spending for the big eight companies rising 12.1 percent. While this is lower than previous quarters, these quarters were fueled by exceptionally strong revenue growth.”

The results were slightly better for the average large firm – particularly when demand and fees worked – but the report said they were still on a “dangerous path”. The 10 big companies in Peer Monitor are Baker McKenzie, Colin Biggers Paisley, Dentons, Gilbert + Tobin, Hall & Wilcox, Jackson McDonald, McCullough Robertson, Mills Oakley, Thomson Geer, and White & Crate.

“With capacity utilization falling a historic 10.1 percent for large companies and productivity well below that of the first quarter of the last three years, large companies are facing immense pressure on profitability.

“Expenditure continues to grow at a record rate, with direct and overhead costs increasing 14.1 percent and 7.6 percent, respectively.

“The combination of flat revenue and historically high growth is an exceptionally dangerous path.”

The Law Partnership Survey includes data and reports on partners, senior associates, female attorneys and emerging topics for the industry. It runs over two weeks and starts on December 2nd.

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