A prolonged period of tough trading conditions has forced a rebalancing in the top end of the legal market, while mid-sized players are growing
Pay freezes, staff cuts and partner exits are the words that best describe the top end of last year’s Australian legal services market.
Against the backdrop of a weak business confidence and stalling M&A activity in 2013, several big firms such as King & Wood Mallesons, Allens and Herbert Smith Freehills cut costs to maintain profitability amid challenges to growing revenue.
In May 2013, Allens managed headcount expenses in a number of ways, including reducing graduate intake, natural attrition, internal relocations and redundancy. This followed a challenging 2012/13 financial year that saw turnover dip by 2.4 per cent from A$440m (£244m) in the previous year to A$430. As a result, lawyer headcount at the end of 2013 was 750, marking a 7.8 per cent reduction. Partner numbers also decreased, by 12 to 164.
Herbert Smith Freehills and King & Wood Mallesons reacted to the same challenging year by imposing pay freezes. However, as market conditions improved both lifted these in May this year.
Clayton Utz, now the largest independent firm in Australia by revenue, also reported a drop of 4.1 per cent, from A$455.4m to A$436.7m in 2012/13. Although the firm did not make any redundancies last year (it did in 2011/12), its lawyer headcount fell by 2.6 per cent.
New chief executive partner Rob Cutler attributes the headcount drop to natural attrition and insists profitability has increased.
“Australia is a well-serviced legal market,” he says. “It will continue to be competitive. Competition means we have to work harder to demonstrate to our clients that what we have to offer is compelling.”
To maintain its leading position in Australia, the firm has done some important internal restructuring. First, it adopted a shared leadership model. The new leadership team, led by Cutler, includes deputy executive partners Bruce Cooper for clients and markets and Kate Jordan for people and development. It has also moved away from the traditional four-department structure – litigation, corporate, property and banking – to 14 national practice groups, to enable better co-ordination of resources and experience.
Along with tighter cost control, senior partner moves are another trend. One of the most notable last year was a 23-lawyer DLA Piper Sydney team joining HWL Ebsworth. The team was led by three partners and focuses on insurance work. The departure came just two weeks after DLA Piper’s former Australia chair and banking and finance head Tony Holland joined Gilbert & Tobin.
King & Wood Mallesons has also suffered a number of senior exits in the past year. Most recently, it lost a 13-strong IP team to Minter Ellison in Sydney. Prior to that, its former global head of disputes resolution Beau Deleuil left to join Quinn Emanuel Urquhart & Sullivan in Sydney, while former Australia managing partner Tony O’Malley, who left last June, has recently launched a boutique in Sydney.
Picking up the pieces
As partners and lawyers leave top-tier or global firms, the mid-tier has been the beneficiary.
HWL Ebsworth and Hall & Wilcox are among the fastest growing firms. The former saw lawyer headcount increase by 21 per cent to 480 and partner numbers up by 15 per cent to 166 in 2013. Earlier this year it grew its national network further with the acquisition of 14-partner South Australian firm Kelly & Co.
Hall & Wilcox also added 35 lawyers, including nine partners.
Another mid-tier firm, Thomson Lawyers, has expanded recently by merging with Melbourne-based Herbert Geer to create Thomson Geer, which now has 80 partners, more than 230 lawyers and annual revenue of A$130m.
“This is the beginning of our next phase of evolution, from the mid-market position we now hold to a much more competitive national position,” managing partner Adrian Tembel told The Lawyer at the time of the merger.
While most Australian firms would agree the market will be in a low-growth gear for the next few years, conditions are improving.
“Things are picking up, but growth is mainly driven by volume as fee rates remain flat and competitive,” says Maddocks CEO Michelle Dixon.
The firm saw a 3 per cent revenue increase for 2012/13 and is expecting better growth in 2013/14. Dixon attributes the rise to a focus on employment and workplace services and government-related mandates.
“The market is changing,” she says. “There’s a need to change the ways of traditional legal practice. Independent firms are more flexible and probably in a better position in a changing market.”
As corporate activity and business confidence recover steadily, the Australian legal market will continue to attract intense international interest.