Australian Financial Review article relating to the Thomson Reuters Peer Monitor report into the Australian legal market.

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Foreign law firms have flooded the market in the past five years. Jessica Shapiro
The nation's largest law firms are in the grip of a tough market
that saw demand for their services slump for the third
consecutive year, triggered in part by a growing trend of
companies taking more work in-house.
The overall drop of about 2 per cent was underlined by more
dramatic falls in core areas including banking and finance (11.7
per cent) and dispute resolution (6.4 per cent). The painful data was revealed in a
Melbourne Law School and Thomson Reuters report that warns Australia's lawyers
appear to be lagging behind their cohort in the northern hemisphere in recovering
from the global financial crisis.
"Firms that choose complacency and mediocrity will rapidly find themselves on the
outer," Melbourne Law School dean Carolyn Evans said.
"The environment is too competitive to allow firms to engage in business as usual
while their clients are demanding innovation and cost containment – if clients are not
finding their demands met, there are plenty of old and new firms with a hunger for
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the more limited work available."
The market disruption is happening against a backdrop of growing numbers of law
graduates, Professor Evans warned. In contrast, enrolments in the United States are
plummeting.
Profit figures remained strong due to the slashing of partner numbers by 5 to 10 per
cent over the past three years: profit per equity partner edged above $700,000 among
big eight firms and $750,000 at global firms.
Global firms – which include heavy hitters Allens, Ashurst, Herbert Smith Freehills,
King & Wood Mallesons, Norton Rose Fulbright and DLA Piper – maintained the
biggest collective hit to demand, down by 4.7 per cent compared to just 1 per cent for
domestic firms. Although some firms reported significant profitability spikes in the
past year, including HSF and Ashurst, Australia-specific data was not made public.
Barolsky Advisers managing director Joel Barolsky said that the domestic firms
seemed to be "winning" in litigation, intellectual property and general corporate
advice; whereas global firms were ahead in M&A and property.
INVESTMENT IN TECHNOLOGY
"It begs the question whether a global brand puts a firm at a disadvantage in targeting
work perceived as domestic or jurisdiction-specific," he said.
Firms are reacting by investing in technology, project management and offshoring
routine work. Corrs has a freelance network, Allens recently opened a new start-up
arm, Accelerate, and a number of the global firms have offshore processing hubs.
"Law firms are banking on technology to make step-change improvements in
efficiency and effectiveness," said Mr Barolsky.
The report covers the nation's eight largest firms plus selected big commercial law
firms. The final quarter of the 2015 financial year recorded a marginal increase in
demand – measured as total billable hours worked by all fee earners – but the report
hesitates to predict that it is the mark of a turning tide.
Mr Barolsky said that recruitment spending was up by 10 per cent for the year; a
promising sign after an 11 per cent drop in total lawyer headcount in the big eight
firms over the past three years.
Partner levels at most of the large firms have dropped. Allens fell from 176 to 148
partners over the three year period; Clayton Utz from 198 to 178; and DLA Piper fell
below the century mark with 89 partners down from 111.
As partner numbers at firms fall, law firm numbers continue to rise.
Foreign firms have flooded the market in the past five years, whether by merger, link
or new footprint. Entry has slowed but they continue to arrive, including Pinsent
Masons and Hogan Lovells in July. In the past 18 months, more than 20 boutique firms
were set up in Australia, including small outfits Talbot Sayer in Brisbane – which
topped M&A league tables a year after opening doors – and Clarendon Lawyers in
Melbourne, who poached Allens managing associate Susie Stone this week and K&L
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Gates partner John Mann earlier this year.
"Rather than having a profession that's crowded or too big or too small, what I think
you have at any given time is a dynamic market and some firms that are reading the
market better than others," Allens chief executive partner Michael Rose said.
"Three or four years ago [foreign] firms were making decisions based on Australia
being at the top of the resources boom, future of growth in China and a strong
Australian dollar.
CIRCUMSTANCES HAVE CHANGED
"They made decisions to meet that market and all of those circumstances have
changed to some extent. Some will be thinking the market is overcrowded, some will
be adjusting."
New entrants and clients taking more work in-house were more a change in market
dynamics than a disruption, Mr Rose said.
"The real areas of disruption for the future are going to be technology and the extent
to which technology changes the way in which people work."
"Technology is going to make people's careers more episodic.
"We are changing our business processes to increase our use of collaborative
technology, and we are looking at various different mechanisms of delivering our
services to clients."
Clayton Utz chief executive partner Robert Cutler said that the "intensely competitive"
market was ultimately for the benefit of clients, and was not overcrowded.
"The disruption really demands firms to be more commercially responsive - not only
time responsive but commercially nuanced," he said.
The firm is plying money into training senior lawyers and partners to better
understand businesses and operate in a commercial manner.
"We must innovate."
This is the first in a weekly series looking at the disrupted legal servicesThis is the first in a weekly series looking at the disrupted legal services
market in Australia.market in Australia.

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