Commonwealth Bank Legal Market Pulse report Conducted by Beaton Research + Consulting 3
Contents Confidence continues to rise as long-term outlook improves 2 Economic Update 3 Overall Business Conditions Perception of business conditions for Australian law firms from now to 2 years time 4 Perceived performance of Australian economy 4 Perception of business conditions in specific areas 5 Revenue predictions Changes in revenue over the next 6 months by location 6 Changes in revenue over the next 6 months by practice area 6 Changes in revenue over the next 6 months by practice area cont. 7 Realised rates Expected changes in realised rates over the next 6 and 12 months 8 Expense and profitability predictions Changes in expenses over the next 6 months 9 Changes in staffing over the next 6 months 9 Business process outsourcing Outsourcing back office functions in the last 12 months 1 Provision of non-legal services Provision of non-legal services 11 Non-legal services percentage of revenue 12 Revenue from non-legal services 12 Adoption of information and communications technologies Adoption of information and communications technologies in the Australian legal market Level of adoption of information and communications technologies in the Australian legal market Investment returns on usage of information and communications technologies 14 Investment in new information and communication technologies 14 Competition from non-traditional (alternative business model) law firms Competition from non-traditional (alt business model) law firms 15 Frequency of competition from non-traditional (alt business model) law firms 16 1
Confidence continues to rise as long-term outlook improves. Securing high calibre talent is a focus amongst some firms, with the report revealing mid-tier businesses are seeking to increase all fee-earning roles with an expected growth in the number of equity and salary partners. Conversely, the top tier firms indicate a decrease in equity and salary partner numbers to increase their leverage ratios. Despite the positive sentiment over the longerterm horizon, the report reveals that revenue expectations are decreasing across the country in all locations except for Melbourne. Of all practise areas, Taxation is forecasting the largest increase in revenue growth. In addition, expenses are flagged to increase in all areas except occupancy. Marc Totaro National Manager, Professional Services Commonwealth Bank Welcome to the third quarter edition of the Commonwealth Bank Legal Market Pulse report conducted by Beaton Research + Consulting. In addition to monitoring key aspects of the industry s performance and outlook, the enhanced report now includes visual tools that will help you to navigate the data and better inform critical decisionmaking within your business. The March report saw quarteron-quarter confidence continue to climb amongst legal firms in Australia, Asia, UK and Europe as the outlook for business conditions is expected to improve. This optimism is buoyed by a brighter economic outlook amongst Managing Partners, an anticipated rise in realised rates along with stable margins over the next six months. That said, business conditions remain tough, particularly in the areas of price negotiation with clients and winning new business. With competition heightening and margin pressure remaining, many firms also indicate that diversification is an important driver of future revenues. One in two respondents report that their firm offers related but non-legal services, and this is expected to increase over the next 12 to 24 months. Interestingly, the competitive landscape also continues to shift, with one in four firms having competed for work with non-traditional (alternative business model) law firms in the past 12 months. As part of a spotlight on technology, the report also reveals that firms will increase investment in new technologies, with mobility solutions and document automation the most widely adopted across the industry. I trust you will find this edition of the Commonwealth Bank Legal Market Pulse report 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. Please contact me if you would like any further information or if you would like to receive further research insights on mid and top tier firms. Marc Totaro National Manager, Professional Services Email: marc.totaro@cba.com.au Phone number: +61 2 933 19 2
Economic Update While revenue expectations amongst law firms remain subdued, the income side of the economy is gradually improving which is a positive sign for business profits and sentiment. Diana Mousina Associate Director Economics, Commonwealth Bank In 14, Australia is faced with the task of successfully transitioning from mining to nonmining led economic growth. Over the past year, a slowdown in mining construction combined with soft activity in the non-mining sector has resulted in below trend growth outcomes. The latest findings from the Commonwealth Bank Legal Market Pulse Report (conducted by Beaton Research + Consulting) indicate that business conditions are trending upwards across the economy, but they remain shaky. Business sentiment towards the short-term outlook continues to be negative but firms are more optimistic about the medium-long term outlook. Business sentiment will need to continue rising in order to support a lift in business spending over the near term. The employment market remains weak, with the unemployment rate rising to 6%. However, positive leading indicators point suggest that we may be nearing the peak in the unemployment rate. Midtier legal firms expect there to be an increase in fee earning staff roles over the next six months. Commonwealth Bank expect the unemployment rate to peak at 6.25% mid-year and then trend down over 15. The arguments for lower interest rates have diminished at the start of 14. Fiscal settings are moving in an expansionary direction in the short term, the AUD has depreciated considerably and the interest rate sensitive parts of the economy are responding to low interest rates and the drop in the currency. The Reserve Bank of Australia continue to prefer stimulus to come in the form of a lower Australian dollar. We expect interest rates to be kept on hold over the majority of 14, with the Reserve Bank starting to increase rates at the end of the year. After an extended period of disparity between the mining and non-mining states, there has been an evening out in economic conditions across the states. Legal firms across the majority of locations reported a weakening in revenue expectations with the exception of Melbourne. It is anticipated that the New South Wales and Victorian economies should see a rise in activity in the near term, driven by the diversified nature of these economies. 3
Overall Business Conditions. Perception of business conditions for Australian law firms from now to 2 years time Business conditions continue on an upward projection, although the short-term outlook remains negative. Perceptions likely to be positive in 12 months. Net % (positive - negative) -43-28 9 67 5 At the moment Likely to be in 12 months' time Likely to be in 2 years' time Perceived performance of Australian economy There is consensus amongst the tiers regarding the broader economy. A net 12.5% of law firms rate the conditions over the next 12 months as positive. Performance of Australian economy over the next 12 months % Total Top tier Mid tier 34 38 33 12.5 12.5 12.5 44 38 46 % 19 25 17 3 4 Very negative Negative Neutral Positive Very positive Net % (positive negative) 4
Perception of business conditions in specific areas The predominant sentiment across most specific business areas remains negative. Firms find it challenging to: Find and keep quality staff, Collect invoices, Win new business and Negotiate price with clients. 28 Net % (positive - negative) 1-3 3-16 -17-16 -43-47 -63-63 -67-66 -63-69 - -88 Accessing capital Keeping quality staff Finding quality staff Keeping expenses under control C ollecting invoices C ompeting with other firms Keeping staff fully utilised Winning new business Negotiating price with clients 5
Revenue predictions. Changes in revenue over the next 6 months by location Revenue expectations have come down this quarter particularly in UK/Europe, Brisbane and Adelaide. Melbourne was the only improver this quarter. Net % (increasing - decreasing) 75 71 62 67 43 27 36 63 19 14 Asia Sydney UK / Europe Melbourne Brisbane Perth Canberra Adelaide 1-29 Changes in revenue over the next 6 months by practice area Firms forecast revenues to improve in 6 practice areas. Taxation and OH&S have had the most positive revenue forecasts with Banking and finance showing improvement this quarter. M&A and corporate advisory, Government and Insurance have remained relatively stable. Net % (increasing - decreasing) 54 64 Employment, workplace and OH&S Taxation 52 43 42 M&A and corporate advisory 32 38 38 36 Construction, engineering and major infrastructure Insurance 42 35 Insolvency and restructuring 21 3 Banking and finance 21 29 Property, environment and planning 6
Changes in revenue over the next 6 months by practice area cont. Revenue expectations have decreased in Competition, consumer law and trade practices. Net % (increasing - decreasing) 36 29 33 26 23 24 38 21 19 19 19 Government Litigation and dispute resolution Intellectual property Competition, consumer law and trade practices IT, telecoms and media 15 Other general commercial work 9 5 Energy and resources 7
Realised rates. Expected changes in realised rates over the next 6 and 12 months Firms are expecting realised rates to increase in the next 6 months and continue to increase over the year. 2.9.6 1. Mean % -.1 3 In the next 6 months (as compared to the last 6 months) In the next 12 months (as compared to the last 6 months) 8
Expense and profitability predictions. Changes in expenses over the next 6 months IT hardware and software and Marketing and business development continue to be the focus for firms. Net % (increasing - decreasing) 37 44 3 31 1 19 IT hardware and software Marketing and business development Staff training and development Occupancy - -3 Library and knowledge management - -3 Telecommunications -27-9 Professional indemnity insurance Changes in staffing over the next 6 months Firms continue to increase lawyer numbers with forecasts in a net increasing position. As in FY firms forecast a reduction in their non fee-earning staff. Net % (increasing - decreasing) 17 6 23 28 17 44-17 -16 - -3-3 Equity partner numbers Fixed share / salary partner numbers Senior Associates / senior lawyers (4th year+) Junior lawyer numbers (Graduates 3rd year) Shared service staff numbers Secretarial and admin staff numbers 9 Paralegals 9
Business process outsourcing. Outsourcing back office functions in the last 12 months 22% of firms have outsourced back office functions in the last 12 months. Yes 8 63 Mid tier Top tier 22 Total 92 No 25 75 Don't know 3 % 1
Provision of non-legal services. Provision of non-legal services Firms have increased their portfolio of non-legal service. 5% of firms are saying they currently provide nonlegal services. Yes 46 5 63 Mid tier Top tier Total No 38 5 54 % 11
Non-legal services - percentage of revenue Despite pressures on traditional legal services, non-legal services still only account for a small percentage of most firms revenues. A few mid tiers have stretched their offering to generate 1% or more from these services. % 6 2.4 9 6 2.2 9 2.1 19 18 9 27 19 25 27 2.5 2. 1.5 Mean % 1..5 1% or more 7.5%-less than 1% 5%-less than 7.5% 2.5%-less than 5% 1%-less than 2.5%.5%-less than 1%.25%-less than.5% Less than.25% Total Top tier Mid tier. Mean Revenue from non-legal services Firms expect the proportion of revenues from non-legal services to increase over the next 12 and 24 months. 12 months 2 years % 7 73..3 Net % -7 Decrease significantly Decrease Remain the same Increase Increase significantly Net % (increase decrease) 12
Adoption of information and communications technologies. Adoption of information and communications technologies in the Australian legal market A quarter of firms believe Australia adopts new technologies at a faster pace than law firms in other countries. Faster than law firms in other countries 25 25 25 At the same pace as law firms in other countries 38 41 5 Mid tier Top tier Slower than law firms in other countries 19 21 Total Don't know 16 17 % Level of adoption of information and communications technologies in the Australian legal market The top tiers are the early adopters when it comes to implementing new information and communications technologies. (Implementing / Implemented) % 1 88 83 72 Total Top tier Mid tier 88 88 75 75 75 67 63 56 53 5 46 46 44 41 41 38 38 33 29 29 Mobility solutions Document automation Collaboration software (to perform tasks like annotating documents) E Discovery software Web based CRM software (e.g. Sales Force) Enterprise social media platforms (e.g. Yammer) Data analytics software Cloud based computing / storage
Investment returns on usage of information and communications technologies 57% of firms still find it difficult or too early to tell if investments in new information and communications technologies have generated any investment returns. 1 Mid tier No 7 Top tier Total 33 Yes 43 36 Don't know (too early to tell) 57 57 57 % Investment in new information and communication technologies Firms to continue to increase their level of investments in new information and communication technologies although 57% have not been able to quantify the returns of these investments. 6 months 12 months 63.3 1 76.7 % 57 67 % 3 17-3 -3 Decrease significantly Decrease About the same Increase Increase significantly Net % (increase decrease) 14
Competition from non-traditional (alternative business model) law firms. Competition from non-traditional (alt business model) law firms 25% of firms have competed for work with non-traditional law firms in the past 12 months. 63 Mid tier No 5 59 Top tier Total 17 Yes 5 25 21 Don't know 16 % 15
Frequency of competition from non-traditional (alt business model) law firms Bespoke Law is cited as the non-traditional provider against which law firms have competed most frequently. 25 14 % 38 25 63 57 5 5 25 29 Plexus Bespoke Law AdventBalance Other Somewhat frequently Rarely Never /almost never 16
For further information Regarding banking services for law firms Marc Totaro, National Manager Professional Services Mobile: 477 739 315 Direct dial: +61 2 933 19 Email: marc.totaro@cba.com.au Web: commbank.com.au/legalmarketpulse Regarding the study or Beaton s services Jarek Dobrjanski, Project Manager Professions Mobile: 411 322 937 Direct dial: +61 3 9829 19 Email: jarek.dobrjanski@beatonglobal.com Web: beatonglobal.com Regarding media inquiries Kate Powditch, Public Relations Advisor Direct dial: +61 2 93353 Email: kathryn.powditch@cba.com.au Web: commbank.com.au/legalmarketpulse 17
This report has been prepared by Beaton Research + Consulting and is commissioned by Commonwealth Bank. The confidential on-line survey used to prepare this report was undertaken by Beaton Research + Consulting in February 14. The report is based on the views of 32 law firms across Australia. Additional market and industry information has been provided by the Commonwealth Bank s Economics team. The report compares results from surveys undertaken in February 14 (Quarter 3) to surveys in October (Quarter 2). This report may be referred to or copied into internal presentations and reports but not published in any communication that will be distributed or accessed externally. When the material is referred to or used, we would welcome due accreditation to the Commonwealth Bank and to Beaton Research + Consulting. Important information: This report is published solely for information purposes. As this report has been prepared without considering your objectives, financial situation or needs, you should before acting on the information in this report, consider its appropriateness to your circumstances and if necessary seek the appropriate professional advice. The information in this report is based on the views of large and mid-sized law firms across Australia and any opinions, conclusions or recommendations are reasonably held or made, based on the information available at the time of its compilation, but 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. Commonwealth Bank of Australia ABN 48 123 123 124. 18
19 COMMONWEALTH BANK LEGAL MARKET PULSE REPORT