Legal Firm Survey - Pitcher · Sta" retention policies need to be in place as high sta" turnover...

February 2017

Legal Firm Survey

Contents

Pitcher Partners helped us with the transition from a sole

proprietor to a three partner law practice. There were lots of complications and it was the sort of transition that requires an accountant with absolute expertise in law practices. Among many other issues, Ashley helped us establish a partnership of trusts and advised well on its relationship to an incorporated legal practice. He was very patient and explained everything well. His involvement reassured our bank that we were on the right track. As a result, we now enjoy a very successful practice that should last into the long term future and maybe even beyond the three of us as individuals.

David Sharrock // Managing Partner // Sharrock Pitman Legal

Executive summary 1

Highlights 2

Revenue and outlook 4

Your largest expense, and biggest asset: wages and staff 6

The bottom line: profit and expenses 7

Technology, source of work, outsourcing 8

Planning, structure and succession 9

Challenges 10

Notes 11

About Pitcher Partners 12

Executive summaryPitcher Partners recently conducted our third annual Legal Firm Survey. The survey was designed to gain further industry insight to help firms make informed decisions during times of change.

Our survey considers:• How firms in Australia are organised

and operate

• Non-financial drivers affecting and enabling firms to succeed and grow

• Firms’ financial performance and indicators from the 2016 financial year and expectations for 2017

• Key industry themes, challenges and opportunities

• Strategies for succession, firm exit and value maximisation

$23.1bREVENUE

1.4%ANNUAL GROWTH 17-22

$3.3bPROFIT

$10.5bWAGES

1.9%ANNUAL GROWTH 12-17

20,076BUSINESSES

Source: IBISWorld November 2016

1

Our 2016 survey reconfirmed many of the major themes that have been emerging in the legal industry whilst challenging others:• Despite ongoing media commentary and predictions about reducing work

and revenues for law firms, 66% of our survey participants grew revenue in 2016 and 73% are forecasting growth in fees for 2017. This may reflect the work they do for the middle market rather than the more volatile corporate markets

• Staff remain a major cost, so utilisation and pricing both need to be a key focus

• Contract lawyers and outsourcing are becoming more popular, perhaps continuing to widen the gap between innovative firms and their competitors.

Clients continue to be sensitive to fees as they look to seek more value for money. Firms need to understand and review pricing and make sure they are successfully communicating the value they deliver to clients.

Firms who continue to focus on their core strengths and delivering services at value driven prices are prospering. Many firms have identified you cannot be everything to everyone in such a rapidly changing market.

Professional wage costs will likely remain flat in the short term as graduate intakes slow and firms increasingly offer flexible working arrangements. Attracting and retaining key talent is a key challenge for most firms and they will need to determine how to tackle this.

Firms need to understand how their competitors are operating to maintain a competitive edge.

Only 55% of firms surveyed have recently used technology to improve the client experience. Firms should ensure they understand current technology trends and client expectations.

For the third year running, less than one in three firms have a documented succession plan in place. Pitcher Partners’ comprehensive international cross industry research on succession planning indicates a majority of business owners are planning to retire, but very few are organised enough to have a documented plan as to how to get there.

Highlights

2

GROWTH IN FEES

THE TOP LINE: REVENUE AND OUTLOOK

42%ACCOUNTING

65%IT

21%ADMINISTRATION

24%LEGAL

Legal survey 2016 Highlights

FINANCIALS77%

OF FIRMS COMPLETED AN ANNUAL BUDGET

REMUNERATION AS % OF PROFESSIONAL FEES

GRADUATE INTAKE 55%OF FIRMS USE TECHNOLOGY TO IMPROVE CLIENT EXPERIENCE

33%YES

67%NO

71%OF FIRMS ACTIVELY REVIEW WIP WRITE OFF

11%IS THE AVERAGE WRITE OFF FOR

THOSE FIRMS

RISE IN PARTNERS DUE TO

DECLINE IN PARTNERS DUE TO

66%OF FIRMS EXPERIENCED GROWTH

73%OF FIRMS ARE EXPECTED TO GROW

2016FY

2017FY

AVERAGE PROFESSIONAL FEES PER EQUITY PARTICIPANT

AVERAGE NET PROFIT PER EQUITY PARTICIPANT

NET PROFIT AS A % OF PROFESSIONAL FEES

$1.51M $1.41M $416K $328K 28% 23%

20162014

2016 2014

2016

2014

ONLY

25%OF FIRMS HAVE A SUCCESSION PLAN

14% 86%

8% 42% 50%PRACTICE AREA CREATED

GROUPS OF PARTNERS HAVE JOINED THE FRIM

GOOD CANDIDATES FOR PARTNERSHIP

NOT ENOUGH GOOD CANDIDATES FOR

PARTNERSHIPGROUPS OF PARTNERS HAVE LEFT THE FIRM

37%26%

38%44%40%

OUTSOURCED SERVICES

CONTRACT LEGAL STAFF

38.1% 37.6%

2016 FY

2017 FY

50.4% 48.6%

2016 FY

2017 FY

11.5% 13.8%

2016 FY

2017 FY

NONE 1-5 5+

3

Revenue increasingDespite general commentary indicating a decline in revenue growth across the legal industry, 66% of firms’ we surveyed experienced growth in fees for 2016 and 73% of respondents are anticipating growth in fees for 2017.

As clients seek greater value for money from their legal services, challenges in maintaining revenue look to be largely a result of downward pricing pressures. Firms need to ensure revenue targets and forecasts are achievable and sustainable and the real value of their work is communicated to clients.

With 73% of survey participants forecasting revenue growth in 2017, and 28% of respondents having fixed fee arrangements in 2016, it is crucial practitioners understand their pricing models and options.

Revenue and outlookFixed Fees on the riseClients are seeking service providers that are faster, better and cheaper and in response, law firms are adopting innovative billing alternatives. We see more and more firms turning away from traditional hourly rate billings and offering fixed, success based, capped and staged/milestone billing options.

As value based billing becomes more prevalent, practitioners need to clearly understand this is not just about setting a fixed fee for their client. Unlike hourly billing models, value billing focuses on the value a firm provides to clients, instead of the time lawyers spend on each engagement. For value based billing engagements, practitioners need to clearly identify the clients’ needs and wants, the projected outcome and where value is delivered to establish a corresponding fee.

Many firms however are still struggling to forego the traditional hourly based billings in favour of alternative billing arrangements.

Regardless of billing methodology firms need to pay clear attention to:

• pricing policies and tools used in pricing each engagement

• ensuring scope of each engagement is clearly defined and out of scope work is billed accordingly

• considering profit margins into pricing policies and strategies

• ensuring all billable time is captured and billed

• clear understanding of the difference and impacts resulting from time based billing vs fixed fee engagements vs value billing

• subjecting quotes to an adequate consultation/ internal review process

• communicating and agreeing both the initial fee and any subsequent changes in scope with the client.

Things to think about…

Are you creating value for your clients or just generating revenue?

4

Clients and fees continue to be a challengeWhile most respondents are predicting increased revenue for 2017, firms are operating in a mature market affected by shifting of work to in-house teams, new technologies such as artificial intelligence and new competitors such as traditional accounting firms providing clients a one stop shop.

Firms need to consider their business model and adapt to the changing market or risk being displaced by alternatives.

ATTRACTING NEW CLIENTS

MARKET/ECONOMIC CONDITIONS

MARKET COMPETITIVE REMUNERATION

THESE SENTIMENTS ARE REFLECTED BY THE KEY CHALLENGES IDENTIFIED BY SURVEY PARTICIPANTS:

AVERAGE PROFESSIONAL

FEES PER EQUITY PARTICIPANT

AVERAGE NET PROFIT PER EQUITY

PARTICIPANT

NET PROFIT AS A % OF PROFESSIONAL FEES

$1.51M $1.41M $416K $328K 28% 23%

20162014

20162014

2016

2014

THE TOP LINE: REVENUE AND OUTLOOK


Are you focusing on business strategy to address these challenges or too closely monitoring day to day operations?

5

Good lawyers – hard to find, hard to keepCompetition for attracting and retaining high calibre staff intensifies as firms continue to lose staff to in-house legal teams, existing competitors and new market entrants. Attracting and retaining staff remains one of the top challenges among survey respondents.

Recent research from Momentum Intelligence, in partnership with Lawyers Weekly, has revealed a significant proportion of Australian legal professionals were approached to switch firms this year. This is borne out by 86% of our respondents whose partner numbers declined saying this happened as a result of whole groups leaving the firm.

Staff retention policies need to be in place as high staff turnover rates will ultimately, and directly, affect a firm’s bottom line.

Flexibility the key to retentionAs more lawyers seek flexible work arrangements, firms need to offer more than purely remuneration based benefits. In an industry known for long and demanding hours, law firms which offer flexible work arrangements ( more than just ‘working from home’), will have a strong advantage in keeping and attracting key talent.

66% of survey respondents’ workforce was made up of 75-100% full time staff and 80% are providing ‘flexible working arrangements’. More research needs to be done to determine if this is working from home, reduced hours, flex time, paid parental leave etc.

Survey results indicate a relatively low level of graduate hires, perhaps due to the outsourcing of more ‘low-level’ work and a move away from the traditional high leverage profit models. If graduate numbers stay low over the long term, firms need to think about how they will grow and attract new talent. Graduates are not only ready to mould but also provide new perspectives and mindsets to a firm.

Where will wages go?There has been some conflicting commentary regarding expected wage movements. We expect wages will remain stagnant because of the strong supply of new lawyers. However, there will clearly be exceptions for critical talent.

Your largest expense, and biggest asset: wages and staff

FLEXIBLE WORK

ARRANGEMENTS

MARKET COMPETITIVE

REMUNERATION

LEARNING AND DEVELOPMENT

PROGRAMS

TOP STAFF RETENTION POLICIES


As staff look for flexible and alternative working conditions, and your firm wants to maintain or improve utilisation, how will you attracting, engage and retain talent?

6

The bottom line: profit and expensesProfits buck market trendsIndustry commentary has predicted declining profit margins, but again, this is not the experience or the prediction of respondents to our survey. Firms servicing the middle market appear to be better managing the volatility. The majority of our survey respondents expected net profits to increase in 2017. Firms surveyed expect net profit growth in excess of growth in gross margin, suggesting law firms are looking to reduce overheads to increase bottom line profits. Growing fees in a tough market while implementing expense reductions will be a tough ask and we look forward to seeing how firms fair in future surveys.

There has been a lot said about stagnation in lawyer wages and competition for graduate roles. As firms look to retain and engage existing talent and attract quality lateral hires, they should consider and forecast wage increases as a percentage of revenue in the short term. This increase will directly affect each firm’s bottom line if not well managed and planned for.

Professional wages as a percentage of revenue was 37.25% for survey participants in 2016. Given staff represent both the biggest expense, and largest asset of your firm, it is important to have a robust, up to date staff attraction, engagement and retention plan.

Write offs a major expenseInterestingly, 29% of firms surveyed do not actively review WIP write off. For those who do, the average write off is 11%. At 11%, WIP write off would be one of, if not the, largest expense behind salary and wages for most firms. As this expense is likely not reported in most firms’ profit and loss, you need to be aware exactly how much it is affecting your bottom line profit.

Managing bottom lineOverall, the following factors are most likely to lead to improved profitability in the current market:

• better management practices

• develop new service lines and build referral networks to expand into new markets

• regularly review hourly rates

• review and consider current pricing policies

• outsourcing high cost services

• improving staff utilisation and client engagement management

• advertising in new platforms and reviewing advertising in traditional media

• utilising technology to reduce costs and increase process efficiencies

• reducing cost wastage rather than just reducing costs

• actively reviewing and managing WIP write off

• preparing and tracking an annual budget

TOP 3 WIP WRITE OFF REASONS

TIME/FIXED PRICE OVERRUN

CLIENT PUSH BACK ON FEES

BUSINESS DEVELOPMENT


Is your firm in a position to plan for profitable growth and actively manage your biggest asset and expense: employees?

7

Client facing technology under usedCurrent technological advancements within the legal industry may radically transform how the profession works. There has been a lot of discussion in the media around Artificial Intelligence (‘AI’) revolutionising and disrupting the legal industry, however the general uptake and impact of AI has thus far been minimal. Where we expect the rise of AI will have implications will be for small to mid-tier firms who rely on income from relatively standardised legal work such as conveyancing.

Only 55% of firms surveyed use technology to improve the client experience. Firms should ensure they understand current technology trends and expectations; client facing technology is about far more than websites and email bulletins.

Technology poses a range of challenges but brings with it opportunities to value add or increase efficiency if correctly implemented. Firms need to decide whether and how to embrace new technology or risk becoming outdated and being left behind.

Personal contact still the greatest source of workAs with previous years, the predominant source of new work came from existing client/contact referrals, followed closely by partner and staff business development. Online presence was the next key channel for generating new work.

While finding and adopting new online advertising avenues will be important for brand recognition, the most effective business development activities for professional services remain personal, namely referral relationships and networking.

Outsourcing on the riseWhile some firms remain hesitant, many are beginning to accept outsourcing. Legal service costs remain high and Australian businesses generally are increasing the amount of work outsourced.

You need to be aware of your competitors’ uptake of outsourcing and how this may provide a competitive edge. Allocating work to cheaper resources not only lowers cost but also frees up professional time for more valuable interactions with clients.

Equally important to outsourcing aspects of legal/professional services, is considering aspects of a firm that do not currently add direct value to a client and where reduction in costs could directly improve profitability; for example: IT, marketing, finance and HR.

4 in 5 survey participants outsource practice functions ranging from legal services to administration, with IT being the most common outsourced function.

1 REFERRALS FROMEXISTING CLIENTS

2 MORE WORK FROM EXISTING CLIENTS

3 BUSINESS DEVELOPMENT BY PARTNERS

4 BUSINESS DEVELOPMENT BY STAFF

5 PROMOTION ONLINE (WEBSITE, ADWORDS ETC.)

Technology, source of work, outsourcing

55%FIRMS USE TECHNOLOGY TO IMPROVE CLIENT EXPERIENCE


Has your firm developed a strategy for adoption and implementation of technology and alternate business models to ensure you are technologically future proof?

8

StructureThe structure of your firm can impact on a variety of business and practitioner affairs:

• Ownership

• Control

• Ability to limit liability

• Asset protection

• Tax implications

• Superannuation

• Regulatory constraints

• Exit requirements and projected business duration

• The nature of the business

• Number of employees

• Customer relationships

The small business restructure rollover, introduced 1 July 2016 may allow small businesses to transfer active assets from one entity to one or more other entities without incurring an income tax liability.

Groups of partners parting companyInterestingly legal firms seem to still be dogged by instability with large numbers of respondents having had whole groups of partners leave the firm. The increase in partner movements is reflective of the changing landscape of the legal services industry.

These active partner movements shouldn’t be a surprise given the globalisation and competitive nature of the legal market coupled with new entrants to the legal market such as the Big 4 accounting firms. Business strategy needs to be balanced across the firm to ensure whole practices do not leave gaps in the offering you can take to market.

Still no succession plan on paperIncredibly, still only a quarter (24.66%) of firms who completed our 2016 survey have a documented succession plan. Of those, 3/4 plan to grow and/or buy with a view to sell. Survey respondents indicated that key people was the top challenge faced in succession planning. Firms should have programs and clear career progression/paths for staff to enable them to progress to a partnership level within the firm and solve succession planning concerns. Looking at a traditional law firm hierarchy of Equity Partners, junior partners and Associates, firms should have procedures in place to identify and engage Associates who have the potential to be future equity participants.

Our previous research surveys indicated that half of firms have an average age of equity partners over 50 years old; 2015: 48%, (2014: 50%).

A well mapped succession plan will ensure current internal processes and policies are aligned with exit goals.

Planning, structure and succession

SUCCESSION CHALLENGES12%

PARTNER CONTROL OF FEES

7%LACK OF BD/MARKETING

5%LACK OF ONGOING WIP/RECURRING FEES

5%OTHER5%

MANAGEMENT NOT STRONG ENOUGH

66%KEY PEOPLE


As firms evolve and change, are you managing expectations and relationships?

9

The top four challenges faced by respondents continue to be the “usual” suspects; attracting new clients, attracting and retaining staff, succession and market/economic conditions.Firms appear to be aware of the challenges they face and we question how active firms are in responding to those challenges. Firms need to ensure they are open and willing to accept change but also conscious of existing opportunities, ensuring they identify any existing referral networks and cross-selling opportunities, whilst considering and implementing new ways to offer their services.

Practitioners are faced with an increasingly complex world and if history has taught us anything it’s that change is enduring so we need to get comfortable being uncomfortable.

This new paradigm is challenging every facet of a firm; most of all, culture. Culture is often misunderstood but when nurtured correctly culture can be a sustainable competitive advantage in every aspect of the business, underpinning strategy and performance. It’s what binds your clients to you when times are tough.

Building a healthy organisational culture is essential for survival in this new economy. So how do you create a healthy culture in your firm?

! Build the change team Identify a team of motivated and respected ambassadors from every aspect of the practice.

! Be client focused Start with a client-focused approach, then work back.

! Explore and Challenge Discuss what the current culture looks and feels like, and any impediments to change.

! Create the vision Build a picture of what the ideal culture might look like by creating a vision statement.

! Socialise and evangelise Develop an internal communication program to share these ideas with everyone.

! Celebrate the wins Consider small rewards and milestones within divisions to celebrate the desired behaviour.

! Keep the momentum Continue to survey and measure employee engagement and track against agreed milestones.

ChallengesTOP 4 CHALLENGESFACED BY FIRMS

ATTRACTING NEW CLIENTS

ATTRACTING AND RETAINING STAFF

SUCCESSION

MARKET/ECONOMIC CONDITIONS


Is your firm in a position to adapt and change to differentiate yourself from competitors?

10

Notes…

11

Our commercial services to dynamic businesses

Financial essentials• Accounting and Business

Advisory Services• Audit, Risk Management

and Assurance• Internal Audit• Recovery, Turnarounds

and Insolvency• Tax advice and Compliance

Planning and growth• Business Consulting

and Commercial Advice• Business Performance Improvement• Business Structuring• Corporate Finance• Corporate Governance• International Business Advisory• Investment Advisory Services• Succession Planning• Superannuation Services• Tax Consulting• Technology and IT Consulting• Valuations

Our private wealth services• Estate Planning• Family Office Management• Investment Advisory Services• Philanthropy Services• Succession Planning• Superannuation Strategies• Tax Advice and Compliance

Industry specialisations• Retail• Professional services• Health and aged care• Manufacturing• Not for profit• Property and construction• Government and the public sector• Agriculture• Food and beverage• Hospitality

Pitcher Partners refers to the Victorian partnership and its associated entities including Pitcher Partners Advisors Limited, Pitcher Partners Consulting Pty Ltd, Pitcher Partners Corporate Pty Ltd, Pitcher Partners Corporate Finance (Vic) Pty Ltd and Pitcher Partners Investment Services Pty Ltd.

$3.2bnWorldwide revenue 2016 (USD)

147Countries

30,000+Partners and staff globally

113Partners nationwide

1,280+People nationally

Melbourne

670+Total Melbourne staff

45Melbourne partners

About Pitcher PartnersPitcher Partners is a full service accounting and business advisory firm with a strong reputation for providing quality advice to privately-owned, corporate and public organisations.In Australia, Pitcher Partners has firms in Adelaide, Brisbane, Melbourne, Perth, Sydney and Newcastle. We collaboratively leverage from each other’s networks and draw on the skills and expertise of 1,200+ staff, in order to service our clients.

Pitcher Partners Melbourne is the leader in the middle-tier market and is the largest accounting services firm in Melbourne after the Big 4 multinational firms.

Pitcher Partners is also an independent member of Baker Tilly International, the eighth largest network in the world by fee income. Our strong relationship with other Baker Tilly International member firms, particularly in Asia Pacific, has allowed us to open many doors across borders for our clients.

Pitcher Partners is a national association of independent firms.Liability limited by a scheme approved under Professional Standards Legislation.

12

2015

AUSTRALIAN ACCOUNTINGAWARDS 2015

FIRM OF THE YEAR – LESS THAN $

1BN 2015


GRADUATE PROGRAM OF THE YEAR 2015


THOUGHT LEADER OF THE YEAR 2014


THOUGHT LEADER OF THE YEAR

TAX & ACCOUNTINGEXCELLENCEAWARDS 2015 Accounting Firm of the Year

WINNER

Accounting Firm of the Year

Tax Team of the Year

Disclaimer // In this proposal, Pitcher Partners refers to the Victorian partnership and its associated entities including Pitcher Partners Advisors Proprietary Limited, Pitcher Partners Consulting Pty Ltd, Pitcher Partners Corporate Pty Ltd, Pitcher Partners Corporate Finance (Vic) Pty Ltd and Pitcher Partners Investment Services Pty Ltd.

Awards

Alexis Kokkinos David Knowles

Firm locations

Pitcher Partners has the resources and depth of expertise of a major firm, but with a smaller firm feel. We give our clients the highest level of personal service and attention. That’s the difference.

MELBOURNE

SYDNEY

PERTH

ADELAIDE

BRISBANE

NEWCASTLE

13

2017_legal-survey_national_170214

Get in touch…

MELBOURNEJohn Brazzale | Managing Partner +61 3 8610 5000 [email protected]

ADELAIDETom Verco | Managing Principal +61 8 8179 2800 [email protected]

SYDNEYRob Southwell | Managing Partner +61 2 9221 2099 [email protected]

BRISBANERoss Walker | Managing Partner +61 7 3222 8444 [email protected]

PERTHBryan Hughes | Managing Partner +61 8 9322 2022 [email protected]

PITCHER.COM.AU

NEWCASTLEMichael Minter | Managing Partner +61 2 4911 2000 [email protected]

Pitcher Partners is an association of independent firms. Liability limited by a scheme approved under Professional Standards Legislation.

Ashley Davidson MELBOURNEBusiness, Tax and Advisory Partner

+61 3 8610 [email protected]

Michael Minter NEWCASTLEManaging Partner


Peter Camenzuli BRISBANEBusiness Advisory Partner


Tom Verco ADELAIDEManaging Principal


Leon Mok PERTHExecutive Director, Taxation Services

+61 9322 [email protected]

Rob Southwell SYDNEYManaging Partner


Legal Firm Survey - Pitcher · Sta" retention policies need to be in place as high sta" turnover...

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