AU Legal Industry Optimistic Despite Recession Threats

The threat of a recession and the accompanying slowdown in spending is seen as the biggest headwind by far for 2023 for small and medium-sized law firms across the country; however, the majority remain optimistic about revenue growth, with only one in eight forecasting a decline, according to the New Law CLE Australian Legal Industry Report 2023.

Just under a third of respondents expect to see revenue increase by more than 10%, with the same amount forecasting growth of up to 10%; a quarter expect revenue to remain the same, and 12% expect a decline.  

Lack of time was declared the current greatest challenge as a smaller legal practice in Australia (60%), followed by Increased expectations from clients (38%), lack of staff (37%), increased compliance (37%), and lack of resources (34%).

When asked what their investment priorities were for the year, marketing received the top vote from 50% of respondents, closely followed by work-life balance at 49%, then self-training and development (39%), staff training and development (36%) and technology upgrades (31%). A practice management system upgrade came in at 10% and mobility at 6% of responses.

“By a slim margin, marketing is the number one priority for small and medium-sized law firms this year,” said Steve Hantos, CEO of Smarter Drafter and commissioner of the report. “This suggests now more than ever, law firms are starting to see themselves more like traditional businesses that need to build their brand, generate leads and build relationships with customers. This is also consistent with the commodification of many legal services, where often, the firm that wins the work is the one with the best marketing. It’s also great to see that firms are committed to investing in better work-life balance for staff as an important part of their culture rather than shifting back to how they operated pre-pandemic”.

87% of respondents said work/life balance was an important part of the culture at their firm, with 11% noting that was only in theory and that in practice, employees were still expected to prioritise work.

Death of the billable hour?

More than half of respondents (54%) agreed that the billable hour is not a sustainable mechanism for continuous improvement, while only 17% disagreed with that statement, and 29% remained neutral.

In fact, evidence shows more firms shifting to fixed-fee pricing, with almost a quarter of respondents (23%) making more than 90% of their revenue from fixed-fee matters (up from 18% in 2022), with the same amount accruing 50 – 90% of their revenue in this way (slightly down from 28% in 2022). One-fifth brings in 25 to 50% of their income through fixed fees (slightly down from 25% in 2022), with 17% bringing in 10 to 25% of revenue (14% in 2022) and the same amount less than 10% (15% in 2022).

When asked whether fixed pricing impacts client retention and loyalty, firms were divided, with 53% believing it increases retention and 46% stating it had no tangible impact. Only 1% of respondents think it decreases retention.

Looking to new and alternative ways of offering legal services, only 7% of firms offer a subscription service.

Pricing Trends

Across all legal services, pricing has risen by 6 per cent on average from 2022. The sharpest increases have been seen in corporate law, with the cost of IP licence agreements, loan agreements, company constitutions, and business sale agreements increasing 10 – 15%. These services for corporate customers and transactions also yielded the highest hourly rates for lawyers and, coupled with a decrease in the average time taken to deliver the services, made it one of the most profitable areas of law in 2023.

Unsurprisingly, given the extreme level of competition, conveyancing remains one of the least profitable legal services. While more conveyancing is being done online, the need for inputs from official institutions and monopoly providers has made progress slow in terms of reducing costs and drafting time for documents.

The cost of employment law services, including employment contracts and independent contractor agreements, jumped by 15% in 2023, twice the industry average. Although a lot of documents are now bundled into corporate HR software, changes to the law and regulatory body rulings are making this area more specialised, allowing employment lawyers to charge higher rates.

Intellectual Property law is highly specialised and charged the highest implied hourly yield of any practice area in the survey. With technology companies the most cashed up of all industries, it’s not surprising that End User licence agreements also yield lawyers more per hour worked than any other legal service. With the increasing popularity of AI tools that depend on third-party content to populate their models, like ChatGPT, the expectation is that IP lawyers will remain in high demand.

The profitability of finance law remains above average in 2023, with the technology industry’s capital preferred capital raising mechanism, the SAFE, providing lawyers with the second-highest per-hour rate of any service, although the process is quite standardised.

While criminal lawyers reported a large jump in prices charged in 2022, these have fallen back to their 2021 level.   

Average prices and implied yields for estate planning services have increased across the board while drafting times have significantly decreased, often by more than 30 minutes. The price difference between simple and complex wills remains substantial, often more than double. 

While the average prices charged for family law services didn’t change from 2022 to 2023, the time taken to collect data and draft documents has fallen dramatically, with respondents spending 30 – 50% less time delivering services this year. Tools such as online questionnaires, calculators and automated document assembly are the biggest factors supporting this reduction.  

The type of legal services provided is not the key criteria when firms come to setting pricing. Most firms set the cost based on the time and effort required (93%), followed by the complexity of the matter (82%), the level of experience (72%) and the practice area type (62%).

Aside from pricing, referrals from satisfied clients are the outstanding method that firms use to compete with other firms (91%), followed by focusing on a particular niche in the market (49%), increased marketing and brand-building (39%) and modern service delivery such as the use of online tools (35%).

Hourly Rates

Following the trend from 2022, there was a modest increase in the hourly billing rates of paralegals (+$9) and junior lawyers (+$4), particularly in smaller firms where they tend to be more involved with the client. There was a notable increase in fees charged by senior lawyers (+$23), while partners have increased their hourly rate by $40. 

On an hourly basis, small to medium firms charged more, while firms located in the CBD were more likely to charge higher prices than those in rural or remote areas across almost every service. Interestingly, medium-sized firms (11 – 50 fee earners) took a greater number of hours to complete a service.

The Impact of Technology

When asked how they feel about the impact of legal technology on them and their firm, 43% of respondents feel that it’s making work more enjoyable and profitable, 21% are excited about the future revolution in legal services,

27% are indifferent and feel it neither helps nor hinders them, while 9% are overwhelmed and find the pace of change difficult to keep up.

64% of respondents do not believe AI poses a threat to the legal services sector. 43% of firms believe AI-enabled tools will make lawyers more valuable, while 30% believe it will render them less valuable, and 27% think it will make no difference.

“As Artificial Intelligence, Machine Learning and automation become more integrated into the legal industry, it raises valid questions about their impact on traditional billing structures and roles and even whether certain legal professions will become obsolete. With the New Law CLE Australian Legal Industry Report, we commit to keeping law firms abreast of pricing and technological developments across their industry and practice areas to ensure they are equipped to navigate this ever-changing landscape,” Hantos added.

When asked about how they would spend their time if automation was used to find and correct drafting errors, the respondents noted business development and client acquisitions (57%) and doing something outside of work, such as time with family or playing sports (57%), alongside improving internal processes at the firm (51%) and further education (34%).