Australian law firms are mirroring the global trend of experiencing flat profits in the legal industry. Partner pay is expected to decline for the first time in seven years due to a surge in expenses. While top commercial firms in the US and Britain saw revenue increase during 2022-23, there was little or no growth in profit per equity partner (PEP).
Thomson Reuters’ senior manager, William Josten, indicated that the Australian legal industry would likely follow suit, as it failed to recover from a poor first quarter when PEP fell by 7 percent.
The last time a contraction in profit per equity partner was seen in Australia was in the financial year 2016, and this trend seems likely to continue in financial year 2023, along with reduced legal pay from Australian law firms as we have reported.
In the US, the decline in PEP for 2022 marked the first time since 2009, partly due to the significant growth in associate compensation. These trends are not unique to the US market but are affecting various regions, including the UK, Australian and New Zealand law firms.
In Australia, nearly one-third of associates (31.6 percent) left their firms during 2021-22, which was higher than their counterparts in the US. The data on law firm finances is drawn from Thomson Reuters’ Peer Monitor, which collects information from the financial management systems of law firms, including most of the top 20 firms by size in The Australian Financial Review Law Partnership Survey.
In the UK, during the recent reporting season, the top eight London-based firms reported a decline in PEP of up to 6.6 percent. Global firms Ashurst and Herbert Smith Freehills maintained a steady PEP of around $2.2 million, a result they considered “pleasing.”
Eversheds Sutherland stood out with a 4 percent rise in PEP after announcing a tie-up with King & Wood Mallesons.
Among the UK’s magic circle firms, Freshfields Bruckhaus Deringer led the pack with a 1 percent increase in PEP to an impressive £2.09 million. However, they still fell short compared to the top PEP firms in the US for 2022, with Kirkland & Ellis surpassing longtime leader Wachtell, Lipton, Rosen & Katz.
The surge in demand led to a notable increase in expenses, both direct (lawyers) and indirect (overheads), which affected PEP growth. The tough economic conditions are likely to continue into the current financial year, with demand for services still strong but not at the levels seen in the 2021-22 boom.
Some UK-based firms have close ties to Australia through mergers or boutique operations. Herbert Smith Freehills and Ashurst have merged, while Allen & Overy, Clifford Chance, and Clyde & Co operate as boutique firms.
To be considered truly global, law firms must generate a substantial portion of their revenue from the US market, which is a driving factor behind some firms’ expansion into the US.
It is clear that the legal industry in several jurisdictions, including Australia, is experiencing a period of flat profits and declining profit per equity partner. The surge in expenses and changes in demand have contributed to this trend, leading law firms to adapt their strategies to remain competitive in an increasingly tough market.