CommBank Legal Market Pulse · 2019-08-22 · Welcome to our final CommBank Legal Market Pulse for...

CommBankLegal Market PulseConducted by Beaton Research + Consulting

Quarter 4 2014/15

B

COMMBANK LEGAL MARKET PULSE – QUARTER 4 2014/15

Contents

Foreword 1

Economic outlook 2

Snapshot of survey findings 3

Firm structure

Office locations 5

Primary practice areas 5

Business conditions

Perceived performance of the Australian economy 6

Perception of business conditions – present to 2017 6

Perception of business conditions – by area 7

FY15 financial performance

Total revenue change FY14 to FY15 8

FY15 budgeted and actual revenue results 9

FY15 budgeted and actual expenses results 9

Forecast for EBIT margins in FY2016 10

Revenue predictions

Changes in revenue over the next 6 months – by location 11

Changes in revenue over the next 6 months – by practice area 12

Realised rates

Expected changes in realised rates – next 6 and 12 months 13

Expense and profitability predictions

Changes in expenses over the next 6 months 14

Changes in staffing over the next 6 months 15

Change in operating margins over the next 6 months 16

Competition from non-traditional (alternative business model) law firms

Frequency of competition from non-traditional (alternative business model) law firms 17

Expected competition from non-traditional (alternative business model) law firms - next 12 months 17

Impact of alternative business model firms - next 12 months 18

Entry of international law firms 18

Cessation of international law firm entrants 19

1


Innovation at the core of sustainable growth for law firms

Marc Totaro National Manager, Professional Services Commonwealth Bank

Welcome to our final CommBank Legal Market Pulse for the 2014/15 financial year, conducted in partnership with Beaton Research + Consulting.

The 2014/15 financial year saw optimism generally increase amongst law firms across Australia. While this was encouraging, a backdrop of market volatility and an intensifying competitive landscape has weighed on short term sentiment in the last quarter. We saw the legal sector end the financial year with a more optimistic outlook on the Australian economy when compared to the previous quarter, with overall sentiment still remaining in negative territory. The results have been driven by a more bullish outlook amongst the top-tier compared to the mid-tier firms.

“The 2014/2015 financial year saw optimism generally increase amongst Australian law firms.”

While the view of business conditions in two years’ time remains in positive territory, we saw a softening in the long-term outlook when compared to the previous quarter. This is in part being driven by increasing uncertainty and shifting market dynamics, as the economic transition to non-mining led growth continues.

While views on business confidence have been mixed, we have seen a continuing trend towards innovation in the legal sector in response to competitive challenges and the pursuit of growth.

Areas highlighted in the report across the 2014/15 financial year include a move towards adopting flexible business and staffing models, the continued move towards legal process and service outsourcing, and the utilisation of technology to improve efficiencies.

“We have seen a continuing trend towards innovation in the legal sector in response to competitive challenges and the pursuit of growth.”

We are seeing innovation in the legal sector materialise in a number of ways, with a primary driver being the limitations of further cost rationalisation in improving firm profitability. This is echoed in the report, with most firms managing to control their expenses in the final quarter of 2014/15 financial year, now tracking on or below budget.

This trend is also evident when looking at firms’ continued expectation of an increase in fee earning roles, indicating major cost cutting initiatives may have run their course, as firms look again at revenue growth.

Another key trend is client demand driving the continued move towards outsourcing and offshoring of both routine tasks and lower level legal services typically undertaken by junior lawyers, and importantly an ongoing investment in automation and other technology solutions, such as e-discovery, to reduce costs.

When looking at practice areas, firms indicate no major decline in revenue forecast this quarter, with net improvements across most practice areas compared to the previous quarter. The top-tier firms forecast greatest net growth across IP, M&A and corporate advisory and insolvency and restructuring practice areas, whereas mid-tier firms forecast highest net increase across property, environment and planning, insurance and employment, workplace and OH&S.

I trust you will find this edition of the CommBank Legal Market Pulse informative and useful for your firm’s planning and benchmarking. We look forward to continuing to monitor the legal industry’s sentiment and performance, and sharing these insights with you.

2


Economic outlook

Diana Mousina Associate Director Economics Commonwealth Bank

The three months since our last CommBank Legal Market Pulse have seen positive developments in the Australian economic landscape. There was another rate cut from the Reserve Bank of Australia (RBA) in May, driving the cash rate down 0.25 per cent to a new low of 2 per cent. The Australian dollar also fell, taking pressure off exporters and import-competing sectors, while the Federal Budget introduced measures designed to support household and business confidence. The labour market is also looking stronger, with the unemployment rate declining a little over the past few months to its current level of 6 per cent.

Nonetheless, the growth picture remains patchy across states and industry sectors. That unevenness is reflected in a more subdued short-term outlook among legal firms in this quarter’s report, with perceptions of current business conditions deteriorating. Yet the longer term outlook remains positive.

Globally, growth is looking a little stronger, although volatility will remain an issue in financial markets, continuing to influence consumer and business confidence. There is still significant uncertainty around the timing of the first US Federal Funds rate hike, the future of the Eurozone and slower growth rates in the Chinese economy.

Looking ahead, over the next two years will be the continuing transition to non-mining sources of growth, as resource investment slows. Parts of this growth transition are on track. The residential construction upturn is firmly entrenched, while consumer spending growth has lifted. Resource exports are also surging and will be a significant new source of income growth over the next two years. However, non-mining business capital expenditure remains the missing piece of the puzzle.

The 2015 Federal Budget’s small business package may play some role in boosting investment, with a tax cut and increased depreciation allowance encouraging small businesses to make capital purchases. As a result, business confidence picked up following the Budget, although the consumer reaction has been more mixed. The challenge now is to translate improved confidence into actual spending.

The RBA rate cut reflects a more cautious outlook around the transition to stronger non-mining capex growth. On the plus side, a low-inflation environment gives the RBA the room it needs to adjust rate settings as required, especially since concerns about risks in the housing market are largely confined to Sydney. While the RBA has provided little forward guidance on the interest rate outlook, a below-trend growth and inflation outlook, coupled with concerns the unemployment rate could move higher, mean it is probably too soon to call the end of this rate-cutting cycle. Readings of key data, particularly employment data, will be central to future RBA policy deliberations.

Certainly the employment outlook among law firms is mixed, judging by the results of this quarter’s report. While expectations for total staff numbers have picked up over the last three months, there are wide variations across firms and staff types. On one hand, partner numbers are expected to increase, along with senior associates and junior lawyers. Yet the number of paralegals and secretarial, administrative and shared service staff are expected to decline, as firms continue to pursue efficiencies in the face of intense competition and ongoing price pressure.

3


Snapshot of survey findings

Net % (positive - negative)

Perceived performance of the Australian economy over the next 12 months

Budgeted vs. actual results

Total firms

Top-tier firms

Mid-tier firms

Top 3 challenges for legal firms

13%

-7%-14%

All firms Top-tier firms Mid-tier firms


Expected changes in realised rates +2.9%

Next 6 months

+2.9%Next

12 months

+0.7%Next

6 months

+0.9%Next

12 months

3

-1.0%Revenue

-3.9%Expenses

-2.4%Revenue

-3.8%Expenses

4.9%Revenue

-4.7%Expenses

60%Keeping staff fully utilised

50%Winning new

business

60%Negotiating price with

clients

Mean %

Top-tier firms

Mid-tier firms

Perception of business conditions Revenue expectations by states

In 24 monthsQ3 FY15 Q4 FY15

40%55%

In 12 monthsQ3 FY15 Q4 FY15

13%10%

At the momentQ3 FY15 Q4 FY15

-24% -37%


4


Top-tier firms

Mid-tier firms


Intellectual property

M&A and corporate advisory

Insolvency and restructuring 71%

75%

86% Property, environment and planning

Insurance

Employment, workplace and OH&S 57%

60%

62%

Impact of alternative business model firms over the next 12 months

Effect of international law firm entrants on local firms


Positive / Very positive

Neutral

Negative / Very negative

+37.5%Top-tier firms

-9.1%Mid-tier firms

Increased competition from non-traditional (alternative business model) law firms

Expenses forecast

Q1 FY15 Q1 FY15Q4 FY15 Q4 FY15

20% 29% 24% 30%

Top-tier firms Mid-tier firms

% Yes

4

Likely cessation of international law firm entrants to Australia

of mid-tier firms disagree50%

of top-tier firms disagree 50% IT hardware and software Occupancy

IT hardware and softwareMarketing and business developmentOccupancyStaff training and development

Marketing and business developmentStaff training and developmentLibrary and knowledge managementProfessional indemnity insuranceTelecommunications

Professional indemnity insuranceTelecommunicationsLibrary and knowledge management

Mid-tier firmsTop-tier firms

Top-tier Mid-tier

50%36%

50%46%

18%

Highest revenue growth expectations – by practice area

4

5


Firm Structure

Office locations

Brisbane UK / EuropeMelbourneSydney OtherPerth AdelaideAsia Canberra

%

87

73 70

47

33 30 27 27 23

0

20

40

60

80

100

Primary practice areas

Litigation and dispute resolution

Property, environment and planning

Employment, workplace and OH&S

M&A and corporate advisory (including capital markets)

Insolvency and restructuring

Banking and �nance (including funds management)

Intellectual property (including PTA and IP disputes)

Construction, engineering and major infrastructure (including project �nance)

Competition, consumer law and trade practices

Other general commercial work

IT, telecoms and media

Insurance

Taxation

Energy resources

Government

0 20 40 60 80 100

10097

938787

807777

737373

707070

67

6


Business conditions

Perceived performance of the Australian economy

A greater proportion of mid-tier firms believe the Australian economy will perform negatively over the next 12 months compared to top-tier firms.

Net

%

Net % (positive-negative)Very Positive NegativePositive Neutral

-47 -61

-41

-30 -13

-36

20 23

3 13

-7

13

-14

100

80

60

40

20

0

20

40

60

Total Top-tier Mid-tier

13

Perception of business conditions – present to 2017

Top-tier firms are less optimistic when thinking about long-term business conditions for Australian law firms.

Net

%

Q3 FY15 Q4 FY15 Q3 FY15 Q4 FY15 Q3 FY15

Likely to be in 2 years’ timeLikely to be in 12 months’ timeAt the moment

Q4 FY15

Top-tier Mid-tierTotal

-24 -30-37 -41

-25

010

33

413

38

5

55 5240 45

25

67

-80

-60

-40

-20

0

20

40

60

80

7


Perception of business conditions – by area

Top-tier firms find business conditions less challenging compared to the previous Q3 FY15 report, especially in the areas of competing with other firms and winning new business.

Net

%

Q3FY15

Q4 FY15

Q3 FY15

Q4 FY15

Q3 FY15

Q4 FY15

Q3 FY15

Q4 FY15

Q3 FY15

Q4 FY15

Accessing capital Keeping expenses under control

Keeping quality sta� Finding quality sta�


Collecting invoices

55 57 5763

55

-14 -17

0 0 0 0 0 0 0 0 03 5

-3 -4-17 -22

-10 -14

-28-35

-27

-41

13

50

-100

-80

-60

-40

-20

0

20

40

60

80

-41-33

-43 -47

-13

-59-48-50-48 -50

-25

-59-66-67-65 -60

-50

-64-55-50

-57 -60

-38

-68


-100

-80

-60

-40

-20

0

20

40

60

80

Net

%

Q3 FY15

Q4 FY15

Q3 FY15

Q4 FY15

Q3 FY15

Q4 FY15

Q3 FY15

Q4 FY15

Competing with other �rms

Winning new business Negotiating pricewith clients

Keeping sta� fully utilised

8


FY15 financial performance

Total revenue change FY14 to FY15

Overall, current revenue for both top and mid-tier firms is slightly higher compared to this time last year.

-100

-80

-60

-40

-20

0

20

40

60

80

100

Mid-tierTop-tierTotal

Net

%

Current revenue over by more than 10%

The same as last year Current revenue under by more than 10% Current revenue over by 0%-10%

Current revenue under by 0-10% Mean %

39

18

2.8 5.52

-15

-21

-7

-33

50

17

-9

-27

-10

36

18

9


FY15 budgeted and actual revenue results

Mid-tier firms are more likely to miss their revenue budgets compared to top-tier firms.

-100

-80

-60

-40

-20

0

20

40

60

80

100


Net

%

On budget

Under budget by more than 16%Over budget by 11%-15%

Over budget by more than 16%

Under budget by 0%-5%

Over budget by 0%-5%


Mean

-20

-10

0

10

20

Aver

age

% 8

274

-4

4

-1

4.9

-2.4-27

-19-8

-40

20

20

20

-24

-24-329

10

-10

Over budget by 6%-10%

FY15 budgeted and actual expenses results

Most firms have managed to control their expenses during FY15 and are tracking on or below budget.


-100

-80

-60

-40

-20

0

20

40

60

80

100


Net

%

Over budget by 0%-5% Under budget by 6%-10%

Under budget by more than 16%On budget Under budget by 6%-10%

Mean

-20

-10

0

10

20Av

erag

e %

8

-3.9-4.7

-3.8-30

-35

-15-8-4

-40

-20

20

-20

-19

-33

-33

5

-10

10


Forecast for EBIT margins in FY2016

Overall, law firm leaders forecast a slight increase in EBIT margins during FY16.

The same as last year

-100

-80

-60

-40

-20

0

20

40

60

80

100


Net

%

Increase by more than 10%

Increase by 0%-10% Decrease by by 0-10%

Mean %

45

10

3.6 5.52

-31

-14

-43

43

14

-18

-27

45

9

11


Revenue predictions

Changes in revenue over the next 6 months – by location

Melbourne and Perth based top-tier firms are the most optimistic about positive revenue changes over the next six months.

Net

%

Q3FY15

Q4FY15

Q3 FY15

Q4 FY15

Q3FY15

Q4 FY15

Q3FY15

Q4 FY15

UK / Europe Asia Melbourne Sydney


10088 88

8086 86

67 67 6371

38 3847

59 54 5053 55

17

100 100 100

0

20

40

60

80

100

3350

25

5033 29 29 29

50

14

100

-100

00

35

67

21

60

-8-20

Net

%

Q3FY15

Q4 FY15

Q3 FY15

Q4FY15

Q3FY15

Q4 FY15

Q3FY15

Q4 FY15

Canberra Perth Brisbane Adelaide


-120

-100

-80

-60

-40

-20

0

20

40

60

80

100

12


Changes in revenue over the next 6 months – by practice area

Top-tier firms are forecasting greatest net growth across IP, M&A and corporate advisory, and insolvency and restructuring practice areas. Mid-tier firms forecast highest net increase across property, environment and planning, insurance and employment, workplace and OH&S.

Net

%

Q3FY15

Q4FY15

Q3 FY15

Q4 FY15

Q3FY15

Q4 FY15

Q3FY15

Q4 FY15

Employment, workplace and OH&S

Insurance Property, environment and planning

Government

Q3FY15

Q4 FY15

M&A and corporate advisory


52 5262

25 2011

37

17

52

33 32 3133

50 50 505443 46

75

33

60 60

0

5767

47 43

-40

-20

0

20

40

60

80

100

Net

%

Q3FY15

Q4FY15

Q3 FY15

Q4 FY15

Q3FY15

Q4 FY15

Q3FY15

Q4 FY15

Construction, engineeringand major infrastructure

Competition, consumer lawand trade prectices

IT, telecoms and media Intellectual property

Q3FY15

Q4 FY15

Taxation


45 5043 44

14

50

0

4129

45

67

36 4150

36

2217

24

39

86

1926

50

15

3825

46

63

33

-40

-20

0

20

40

60

80

100

Net

%

Q3FY15

Q4FY15

Q3 FY15

Q4 FY15

Q3FY15

Q4 FY15

Q3FY15

Q4 FY15

Insolvency and restructuring

Other general commercial work

Litigation and dispute resolution

Banking and �nances

Q3FY15

Q4 FY15

Energy and resources


1733

11

35

71

216 0

5033 38 39 41

3022

3318

29

-15

50

29

50

15

-43

3825

63

1833

20

-80

-60

-40

-20

0

20

40

60

80

100

13


Realised rates

Expected changes in realised rates – next 6 and 12 months

This quarter, forecast increase in realised rates is driven by top-tier firms.

Mea

n %

Q3FY15

Q4FY15

Q3 FY15

Q4 FY15

Next 6 months (compared to last 6 months) Next 12 months (compared to last 6 months)


0.3 0.4

1.2

2.9

0.7 0.51.0

1.4

2.9

0.9

-1.5

-0.5

-2

-1

0

1

2

3

14


Expense and profitability predictions

Changes in expenses over the next 6 months

Top-tier firms forecast a net decrease in expenses across all areas except IT hardware and software, and occupancy. Conversely, mid-tier firms expect expenses in IT hardware and software and occupancy areas to increase.

Net

%

Q3FY15

Q4FY15

Q3 FY15

Q4 FY15

Q3FY15

Q4 FY15

Q3FY15

Q4 FY15

IT hardware and software Occupancy Marketing and business development

Staff training and development


2130 34

14

41 3321 23 24

35 32

3 34 90

2114

-3-13 -17 -14 -14-17

-100

-80

-60

-40

-20

0

20

40

60

80

100

017

-10 -10-13 -14 -9-17 -18

-28 -23-28 -33 -31-27

-57 -57

-29

Net

%

Q3FY15

Q4 FY15

Q3 FY15

Q4FY15

Q3FY15

Q4 FY15

Library and knowledge management

Professional indemnity insurance

Telecommunications

Total Top-tier Mid-tier-100

-80

-60

-40

-20

0

20

40

60

80

100

15


Changes in staffing over the next 6 months

Top-tier firms forecast a net increase in partner numbers and a net decrease in paralegals and non-fee

earning staff.

Net

%

Q3FY15

Q4FY15

Q3 FY15

Q4 FY15

Q3FY15

Q4 FY15

Q3FY15

Q4 FY15

Equity partner numbers Fixed share / salary partner numbers

Senior Associates / seniour lawyers

(4th year+)

Junior lawyer numbers(graduates – 3rd Year)


-7

-33

-67

27 2717

3931 36 35

17 17 1727 23

323130

-33

-13

1425

0 0

-100

-80

-60

-40

-20

0

20

40

60

80

100

Net

%

Q3FY15

Q4FY15

Q3 FY15

Q4 FY15

Q3FY15

Q4 FY15

Shared service staff numbers Secretarial and admin staff numbers

Paralegals


-18-20 -27-14

3 59

-63

-31 -33 -30-17 -17

-38

-7-20 -14

-38

-100

-80

-60

-40

-20

0

20

40

60

80

100

16


Change in operating margins over the next 6 months

Top-tier firm leaders forecast a significant decrease in operating margins, compared to their mid-tier counterparts.

Net

%

Q3 FY15 Q4 FY15


24

67

13 1018

-13

-100

-80

-60

-40

-20

0

20

40

60

80

100

17


Competition from non-traditional (alternative business model) law firms

Frequency of competition from non-traditional (alternative business model) law firms

Of the three non-traditional law firms discussed with firm leaders, Advent Balance competes most frequently with traditional law firms.

Net

%

Advent Balance Bespoke Law Plexus

Almost never NeverRarelySomewhat frequently

0

10

20

30

40

50

60

70

80

90

100 13

49

38

20

40

40

17

33

50

Expected competition from non-traditional (alternative business model) law firms - next 12 months

Mid-tier firms forecast a greater level of competition from alternative business model firms compared to their top-tier counterparts.

Net

%

Total Top-tier Mid-tier

31 - 40% 41 - 50%25 - 30%

0

10

20

30

40

50

60

70

80

90

100 7

37

56

25

75

9

41

50

18


Impact of alternative business model firms - next 12 months

The majority of firms do not perceive alternative business model firms will have a great impact on their business in the next 12 months. Interestingly, one in three top-tier firms do believe alternative business model firms will have a positive impact on the Australian legal industry.

-100

-80

-60

-40

-20

0

20

40

60

80

100


Net

%

NegativePositive

NeutralVery positive Mean

73

3.3

37.5

-9.1

-83

-7

-63

24

13

-91

-9

Entry of international law firms

The majority of firms do not expect international law firm entrants to have a great affect on their business. However, approximately one in five mid-tier firms view their entry to the Australian market as a threat.


Q4 FY14


Q4 FY15

Net

%

Neutral NegativePositive / Very positive

0

10

20

30

40

50

60

70

80

90

100

32

58

10

14

57

29

37

59

4

40

47

13

50

50

36

46

18

19


Cessation of international law firm entrants

Opinions are equally divided on whether or not entry of international law firms into the Australian market

will cease.


Q4 FY14


Q4 FY15

Net

%

Disagree / Strongly Disagree Neutral Agree / Strongly Agree

0

10

20

30

40

50

60

70

80

90

100

45

26

29

86

14

33

29

38

50

20

30

50

25

25

50

18

32

20


Further information

Things to know before you Can: This report is published solely for information purposes. As this report has been prepared without considering your objectives, financial situation or needs you should consider the appropriateness to your circumstances and, if necessary, seek appropriate professional advice. This quarterly report has been prepared independently by Beaton Research + Consulting and is commissioned by Commonwealth Bank. The confidential online survey used to prepare this report was undertaken by Beaton Research + Consulting in April to June 2015. The report is based on the views of 30 law firms across Australia. Any opinions, conclusions or recommendations are reasonably held or made based on the information available at the time of its compilation. No representation or warranty, either expressed or implied, is made or provided as to the accuracy, reliability or completeness of any statement made in this report. The project was undertaken in compliance with the requirements of ISO 20252. Commonwealth Bank of Australia ABN 48 123 123 124.

About Beaton Research + Consulting

Beaton Research + Consulting is a full-service research firm which offers a full range of solutions for professional services firms, financial services firms and associations. Their expertise includes benchmarking, thought leadership, brand solutions, customised solutions and client satisfaction.

For further insights or information, please contact:

Marc Totaro, National Manager Professional Services

Mobile: 0477 739 315 Phone: +61 2 9303 1940 Email: [email protected] Web: commbank.com.au/legalmarketpulse

For media inquiries, please contact:Sarah Gibbons, Public Relations Advisor Phone: +61 2 9118 1706 Email: [email protected]

CommBank Legal Market Pulse · 2019-08-22 · Welcome to our final CommBank Legal Market Pulse for...

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