The pandemic-induced lockdown of 2020 turned out the lights on the global economy, resulting in weak earnings in every sector. The legal industry, however, managed to blunt the force of its impact and surprisingly, put up a blockbuster financial performance.
Tony Williams, principal at Jomati Consultants, in a Q&A with Global Legal Post, says that one reason for the increased earnings is that circumstances during the pandemic were different as compared to the financial crisis of 2007-8. During the pandemic, the financial liquidity flow remained as compared to liquidity in 2007-8.
In our recent article titled Law Firm Profitability 2022 Survey Results, we discussed that law firms in the UK, U.S. and Australia announced increased earnings and posted stellar growth in firm revenues. To make sense of this anomaly, we scratch beneath the surface and decipher the reasons behind it.
First, after an initial pause at the start of the pandemic, deal-making resumed by the corporate sector, causing law firms to return to their workstations.
Next, activity in the capital markets, real estate and the banking, financial and corporate sectors did not grind to a complete halt during the pandemic whereas activity in dispute resolution, tax practice and the hospitality, travel and entertainment sectors remained largely muted. This reflects in the earnings of the various practice groups within law firms.
Global industry trends
In the UK, the Magic Circle law firms, in particular, announced impressive revenue growths in FY 2021-22.
- Clifford Chance saw a 10 % increase in its profit per equity partner (PEP) and an 8% hike in revenue.
- Allen & Overy posted a 3% rise in PEP (down from 17% in the preceding year) and a 10% hike in revenue.
- Freshfields posted a 7% revenue increase and an 8% increase in PEP.
Law firms in Australia and the United States display a similar pattern in their financial performance.
According to a report analysing 2022 AmLaw revenues from Above the Law, the AmLaw 100 announced a collective revenue of $127.4 billion, up by 14.8%. The average revenue per lawyer was pegged at $1.18 million, up by 12.5% and the average PEP was $2.66 million, up by 19.4%.
In terms of demand, UK law firms lead while the Australian legal market comes second with the average U.S. law firm trailing in third place.
But, there’s a twist to the tale here. New developments due to tech adoption, hybrid work style and a pandemic-prompted shift in employee mindsets have heralded a change in employee expectations and client demands, throwing up new challenges for the legal industry.
Below, we present an analysis of the Asia-Pacific legal market and the challenges faced by law firms in the aftermath of the pandemic. Watch this space for an analysis of the UK and US legal regions.
Analysis of the Asia-Pacific legal market
In Australia, most law firms posted strong growth during the pandemic. As seen in the 2020 CommBank Legal Market Pulse report, there was a “mean profit increase of 7% across the sector.”
Further, the 2021 ‘State of Small Law Australia Survey’ conducted by cloud-based legal practice management software Smokeball, found that the pandemic impacted law firms “more positively than negatively” in terms of business revenue. Among the 134 small law firms surveyed in 2020-21, 57% enjoyed revenue growth. The report pegs the adoption of technology as the main factor for the yield in revenues, followed by aggressive growth in the real estate sector, successful remote staff management and workload.
Additionally, the Thomson Reuters 2021 ‘Australia: State of the Legal Market’ report reveals that legal demand in Australia rose by an average of 2.2%, while U.S. firms recorded an increase of just 0.5% in demand. Moreover, lawyer growth in Australia increased by 3.4% as compared to 0.5% in the US.
Further still, in the first half of FY 2022, the average legal demand has increased by 6.4% reports the Thomson Reuters 2022 ‘Australian Legal Market Midyear Update’. The update notes that the demand growth has been largely fueled by transactional practices. Australia’s M&A practice is in high demand, mainly due to activity in the mining sector. Tax, banking & finance, IPOs and general corporate work also posted average growth of over 10% through the midpoint of FY 2022.
Another survey of GCs by Thomson Reuters found that demand for legal services would not decline soon except perhaps in the banking and finance sector while regulatory practice would be the most sought.
The increased demand for legal services is slated to see an increase in lawyer headcount. Compensation is typically agreed-upon or worked, rates. The report notes that the work rates have increased at a faster pace.
The challenge for Australian law firms is to recruit more legal professionals to service the high demand, but taking a cue from the U.S., law firms, caution should be exercised about relying solely on increased compensation to retain talent.Mainland China and Hong Kong
The political unrest of 2019 saw the departure of many ex-pats with some international firms closing offices. Uncertainties prevail over whether Hong Kong will continue to remain the flag bearer of the APAC region and retain its position as a global financial centre.
The unrest coupled with the challenges of COVID19 has kept recruitment levels low. National Law (NatLaw) Review’s July 2022 ‘Asia Pacific Legal Market Summary and Partner Moves’ reports that “We are seeing a high volume of available trainees are in the market, with only a handful of firms considering newly qualified associates.”
In mainland China, NatLaw finds that cities are reopening but recruitment is tepid. Most firms in Beijing and Shanghai say that recruitment may pick up later in the year.
Other Asian countries
While global interest in Singapore remains, NatLaw reports that market growth is “steady rather than spectacular, with demand in M&A/private equity, finance and projects”. Currently, traditional financial services companies wanting to offer financial technology services are recruiting lawyers on an interim basis. Singapore anticipates a busy second half in 2022.
In South Korea, law firms continue to experience economic strains and Korea-based international law firms are not recruiting at the moment. Most opportunities for talents lie with local Korean law firms.
In Japan, law firms seem less affected by the global economic downturn, in part due to the Yen/USD exchange rate, which attracts inbound investments. Recruitment is open to native associates although foreign-qualified Japanese-speaking candidates may also be considered.
In India, the economy remains even and law firms continue to announce deals acted for. Recruitment is high, with Khaitan & Co announcing a record hire of 76 freshly minted lawyers.
From 2021 to 2022, the legal industry’s post-pandemic financial health glows as it continues to reap a bumper harvest.
As noted in our March 2022 article titled “Reviewing the Global Legal Industry – 2021”, the demand for legal services did not decline at all. Out-of-the-box solutions and consistent technological evolution proved pivotal in the unbridled times.
An important factor which greatly contributed to the revenue growth of law firms globally was that partners were actively involved in transactions during the pandemic while associates and non-lawyer fee earners had a reduced workload. According to the Thomson Reuters 2021 ‘State of the Legal Market’ survey, partners in Australia engaged in an “above-average” amount of work during the pandemic, which naturally generated higher earnings as partners bill at a higher rate.
The Asia Pacific legal market has seen an uneven growth rate over the last few years.