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The good old days are over: business conditions for law firms volatile

October 28th, 2011 |

The Commonwealth Bank - Beaton Market Pulse for Q1 FY2012 shows that large and middle-sized law firms are experiencing much tougher conditions than at the end of FY2011. Full coverage is available in today's Legal Affairs section of The Australian newspaper. (Print and online: online requires subscription – free for the first 3 months.) While this decline is being felt across the profession, it is particularly driven by the top-tier firms, whose perceptions of business conditions fell from net 50% positive in Q4 FY2011 to net 14% negative. How are firms reacting? Given these conditions, firms are focusing strongly on maintaining fee earner utilisation and managing costs – particularly shared services and secretarial staff costs. Top-tier firms are planning to reduce their staffing in these areas over the next 6 months. However, at this point there is no indication that firms are planning to cut fee earners. In fact, most firms still see numbers growing in the next 6 months. Given this week’s announcement of voluntary redundancies at KPMG, and rumblings of cuts at other Big 4 firms, there is a question about how long this growth can continue. But what has really changed? It’s important to put these results in context. It is a substantial decline in business conditions, but is it only one quarter. Volatility is the one thing we can reliably predict at the moment. Now is not the time to over-react, particularly on staff. That turnover reached 21% in FY2011 shows that firms paid a price for cuts made during the GFC. You don’t want to be cutting staff only to be rehiring them in 6 months’ time. Make no mistake – the “good old days” are over That said, there was a sense of unreality in the profession after a very good end to FY2011. It was as if, having been told repeatedly that we’d dodged the GFC bullet, firms expected a return to the good old days of continual growth in work, rates and profit. The question on everyone’s lips was, “when do you think rates will go up?” This quarter’s Market Pulse simply tells us what firms already knew: the legal landscape has changed, permanently. 25% of top-tiers said they competed with internationals “very frequently” this quarter. 75% said this had increased from the previous quarter. Mid-tiers will not be immune. Those that say, “it’s a top-tier problem – it doesn’t effect us” have got their heads in the sand. Witness today’s news that Mallesons has partnered with Indian LPO Integreon. Meanwhile the “patchwork” economy means that the strongest impact on firms’ profitability will come from their exposure to 1) mining and 2) Queensland. The firms that will succeed will be those that maintain their strategic response to these shifts, while being flexible enough to deal with near-term volatility.    

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