One of the benefits of writing an article at the end of the year is the opportunity to look over what has happened in the past 12 months and make some predictions of which trends will continue into the new year – hence the snappy title of this article.
2017 was a turnaround year in the Australian and New Zealand legal profession. Despite media predictions of doom and gloom, financially at least, most firms had their strongest year for a long time. There is no one-size-fits-all reason for this, but a number of factors are at play. On a macro level, the economies of both countries are improving, and on a micro basis, the tougher years have seen firms work hard on getting their personnel structure right, which has reduced unnecessary costs and the resultant fiscal drag.
Turning to 2018, these are my predictions regarding what the next 12 months will look like:
Good firms of all sizes will do well financially. Demand is increasing and so are the key drivers of profitability; namely, rates and hours.
In 2017 rack rates and realised rates for all categories of fee earner increased and the margin between rack rates and realised tightened. This was possibly helped by the ‘bigger bastard’ theory, where clients know (either through experience of osmosis) that other firms or a group of firms are charging a lot more. This applies to the total cost of matters, not just hourly rates
For the first time in about ten years, recorded hours have increased. I know mention of chargeable hours is anathema to many commentators, but it is still the predominant way of generating fees and is the best measure of utilisation within a firm.
With price and productivity increasing and a buoyant economy to operate in, 2018 should be a great year for good firms.
Personnel structure will continue to evolve
Leverage (the number of employed fee earners per equity principal) as a differentiator has almost disappeared. Clients are increasingly demanding senior lawyers do their work and they are prepared to pay for it. This coincides nicely with what senior lawyers want to do: after all, they trained to be lawyers not people managers.
I see the trend toward leaner teams continuing in 2018. For practices which do the high-end complex legal work, these teams will be a cluster of experienced senior lawyers with very little leverage. For the more commoditised work, firms will make greater use of technology and contractors to ensure those people on the payroll are fully utilised. Gap-filling by contractors will reduce the need for firms to have a large ‘standing army’ to cope with the peaks in demand.
More merger activity
There is interest at both ends of the acquisition / merger spectrum to do a deal where possible. Firms with an expansion mindset see acquiring a firm or practice group as the fastest and cheapest way to grow their business. They will usually have a support structure that can accommodate – both physically and managerially – an additional practice or two which provides economies of scale.
At the other end, an acquisition or merger can provide a firm with a circuit breaker for some of their managerial challenges or deadlocks. This could be anything ranging from succession to disparity in contribution or a hollowing out of market share.
Cash payments for equity will become increasingly scarce
For firms of all size, a lockstep entry to equity is more common than dollars changing hands from the sale of equity between partners. Similarly a merger is more likely than a trade sale between firms. The opportunity for the partners in a firm being acquired is usually the likelihood of earning more in the merged entity, plus a one-off opportunity to realise the firm’s balance sheet.
Like most of the economy, sale of law firm equity is becoming a buyer’s market.
Genuine innovation remains on the horizon
Conferences will continue to be built around innovation, artificial intelligence and a general theme of ‘the machines are coming, so get on board now’. There is no doubt there is plenty of movement in this area but there are also limitations, least of which is widespread client acceptance. So the conference industry is safe for a few years yet.
As I write this in December, I am wishing you all the best for the Christmas break, and looking forward to what will be a prosperous 2018.