CommBank Legal Market Pulse Conducted by Beaton Research + Consulting Quarter 4 14/15
COMMBANK LEGAL MARKET PULSE QUARTER 4 14/15 Contents Foreword 1 Economic outlook 2 Snapshot of survey findings 3 Firm structure Office locations 5 Primary practice areas 5 Business conditions Perceived performance of the Australian economy 6 Perception of business conditions present to 17 6 Perception of business conditions by area 7 financial performance revenue change FY14 to 8 budgeted and actual revenue results 9 budgeted and actual expenses results 9 Forecast for EBIT margins in FY16 1 Realised rates Expected changes in realised rates next 6 and 12 months 13 Expense and profitability predictions Changes in expenses over the next 6 months 14 Changes in staffing over the next 6 months 15 Change in operating margins over the next 6 months 16 Competition from non-traditional (alternative business model) law firms Frequency of competition from non-traditional (alternative business model) law firms 17 Expected competition from non-traditional (alternative business model) law firms - next 12 months 17 Impact of alternative business model firms - next 12 months 18 Entry of international law firms 18 Cessation of international law firm entrants 19 Revenue predictions Changes in revenue over the next 6 months by location 11 Changes in revenue over the next 6 months by practice area 12 B
COMMBANK LEGAL MARKET PULSE QUARTER 4 14/15 Innovation at the core of sustainable growth for law firms Areas highlighted in the report across the 14/15 financial year include a move towards adopting flexible business and staffing models, the continued move towards legal process and service outsourcing, and the utilisation of technology to improve efficiencies. We have seen a continuing trend towards innovation in the legal sector in response to competitive challenges and the pursuit of growth. Marc Totaro National Manager, Professional Services Commonwealth Bank Welcome to our final CommBank Legal Market Pulse for the 14/15 financial year, conducted in partnership with Beaton Research + Consulting. The 14/15 financial year saw optimism generally increase amongst law firms across Australia. While this was encouraging, a backdrop of market volatility and an intensifying competitive landscape has weighed on short term sentiment in the last quarter. We saw the legal sector end the financial year with a more optimistic outlook on the Australian economy when compared to the previous quarter, with overall sentiment still remaining in negative territory. The results have been driven by a more bullish outlook amongst the top-tier compared to the mid-tier firms. The 14/15 financial year saw optimism generally increase amongst Australian law firms. While the view of business conditions in two years time remains in positive territory, we saw a softening in the long-term outlook when compared to the previous quarter. This is in part being driven by increasing uncertainty and shifting market dynamics, as the economic transition to non mining led growth continues. While views on business confidence have been mixed, we have seen a continuing trend towards innovation in the legal sector in response to competitive challenges and the pursuit of growth. We are seeing innovation in the legal sector materialise in a number of ways, with a primary driver being the limitations of further cost rationalisation in improving firm profitability. This is echoed in the report, with most firms managing to control their expenses in the final quarter of 14/15 financial year, now tracking on or below budget. This trend is also evident when looking at firms continued expectation of an increase in fee earning roles, indicating major cost cutting initiatives may have run their course, as firms look again at revenue growth. Another key trend is client demand driving the continued move towards outsourcing and offshoring of both routine tasks and lower level legal services typically undertaken by junior lawyers, and importantly an ongoing investment in automation and other technology solutions, such as e-discovery, to reduce costs. When looking at practice areas, firms indicate no major decline in revenue forecast this quarter, with net improvements across most practice areas compared to the previous quarter. The top-tier firms forecast greatest net growth across IP, M&A and corporate advisory and insolvency and restructuring practice areas, whereas mid-tier firms forecast highest net increase across property, environment and planning, insurance and employment, workplace and OH&S. I trust you will find this edition of the CommBank Legal Market Pulse informative and useful for your firm s planning and benchmarking. We look forward to continuing to monitor the legal industry s sentiment and performance, and sharing these insights with you. 1
COMMBANK LEGAL MARKET PULSE QUARTER 4 14/15 Economic outlook Looking ahead, over the next two years will be the continuing transition to non-mining sources of growth, as resource investment slows. Parts of this growth transition are on track. The residential construction upturn is firmly entrenched, while consumer spending growth has lifted. Resource exports are also surging and will be a significant new source of income growth over the next two years. However, non-mining business capital expenditure remains the missing piece of the puzzle. Diana Mousina Associate Director Economics Commonwealth Bank The three months since our last CommBank Legal Market Pulse have seen positive developments in the Australian economic landscape. There was another rate cut from the Reserve Bank of Australia (RBA) in May, driving the cash rate down.25 per cent to a new low of 2 per cent. The Australian dollar also fell, taking pressure off exporters and import-competing sectors, while the Federal Budget introduced measures designed to support household and business confidence. The labour market is also looking stronger, with the unemployment rate declining a little over the past few months to its current level of 6 per cent. Nonetheless, the growth picture remains patchy across states and industry sectors. That unevenness is reflected in a more subdued short-term outlook among legal firms in this quarter s report, with perceptions of current business conditions deteriorating. Yet the longer term outlook remains positive. Globally, growth is looking a little stronger, although volatility will remain an issue in financial markets, continuing to influence consumer and business confidence. There is still significant uncertainty around the timing of the first US Federal Funds rate hike, the future of the Eurozone and slower growth rates in the Chinese economy. The 15 Federal Budget s small business package may play some role in boosting investment, with a tax cut and increased depreciation allowance encouraging small businesses to make capital purchases. As a result, business confidence picked up following the Budget, although the consumer reaction has been more mixed. The challenge now is to translate improved confidence into actual spending. The RBA rate cut reflects a more cautious outlook around the transition to stronger non-mining capex growth. On the plus side, a low-inflation environment gives the RBA the room it needs to adjust rate settings as required, especially since concerns about risks in the housing market are largely confined to Sydney. While the RBA has provided little forward guidance on the interest rate outlook, a below-trend growth and inflation outlook, coupled with concerns the unemployment rate could move higher, mean it is probably too soon to call the end of this rate cutting cycle. Readings of key data, particularly employment data, will be central to future RBA policy deliberations. Certainly the employment outlook among law firms is mixed, judging by the results of this quarter s report. While expectations for total staff numbers have picked up over the last three months, there are wide variations across firms and staff types. On one hand, partner numbers are expected to increase, along with senior associates and junior lawyers. Yet the number of paralegals and secretarial, administrative and shared service staff are expected to decline, as firms continue to pursue efficiencies in the face of intense competition and ongoing price pressure. 2
COMMBANK LEGAL MARKET PULSE QUARTER 4 14/15 Snapshot of survey findings Perception of business conditions Revenue expectations by states 1% 13% 55% 4% -24% -37% At the moment (positive - negative) In 12 months In 24 months Perceived performance of the Australian economy over the next 12 months Budgeted vs. actual results 13% firms -1.% Revenue -3.9% Expenses -7% -14% All firms firms firms (positive - negative) firms 4.9% Revenue -4.7% Expenses Top 3 challenges for legal firms 6% Negotiating price with clients 6% Keeping staff fully utilised 5% Winning new business firms -2.4% Revenue -3.8% Expenses Mean % Expected changes in firms realised rates +2.9% Next 6 months +2.9% Next 12 months firms +.7% Next 6 months +.9% Next 12 months 3 3
COMMBANK LEGAL MARKET PULSE QUARTER 4 14/15 Likely cessation of international law firm entrants to Australia Expenses forecast firms 5% of top-tier firms disagree IT hardware and software Occupancy 5% of mid-tier firms disagree Marketing and business development Staff training and development Library and knowledge management Professional indemnity insurance Telecommunications Increased competition from non traditional (alternative business model) law firms Q1 % Yes % 29% 24% 3% firms Q1 firms firms IT hardware and software Marketing and business development Occupancy Staff training and development Professional indemnity insurance Telecommunications Library and knowledge management Effect of international law firm entrants on local firms 5% 5% Positive / Very positive Neutral 36% 46% 18% Negative / Very negative Highest revenue growth expectations by practice area firms Intellectual property M&A and corporate advisory Insolvency and restructuring 71% (positive - negative) 86% Property, environment and planning 75% Impact of alternative business model firms over the next 12 months (positive - negative) firms Insurance 62% 6% Employment, workplace and OH&S 57% +37.5% firms -9.1% firms 4 4
COMMBANK LEGAL MARKET PULSE QUARTER 4 14/15 Firm Structure Office locations 1 87 8 73 7 6 47 % 4 33 3 27 27 23 Sydney Melbourne Brisbane Perth Asia Other Canberra UK / Europe Adelaide Primary practice areas Litigation and dispute resolution Property, environment and planning Employment, workplace and OH&S M&A and corporate advisory (including capital markets) Insolvency and restructuring Banking and finance (including funds management) Intellectual property (including PTA and IP disputes) Construction, engineering and major infrastructure (including project finance) Competition, consumer law and trade practices Other general commercial work IT, telecoms and media Insurance Taxation Energy resources Government 1 97 93 87 87 8 77 77 73 73 73 7 7 7 67 4 6 8 1 5
COMMBANK LEGAL MARKET PULSE QUARTER 4 14/15 Business conditions Perceived performance of the Australian economy A greater proportion of mid-tier firms believe the Australian economy will perform negatively over the next 12 months compared to top-tier firms. 6 4 4 3 13 13 23 13-7 -14-47 -41-61 6 8-3 -36-13 1 Very Positive Positive Neutral Negative (positive-negative) Perception of business conditions present to 17 firms are less optimistic when thinking about long-term business conditions for Australian law firms. 8 6 4 1 33 4 13 38 5 67 55 52 4 25 45 - -4-24 -3-25 -37-41 -6-8 At the moment Likely to be in 12 months time Likely to be in 2 years time 6
COMMBANK LEGAL MARKET PULSE QUARTER 4 14/15 Perception of business conditions by area firms find business conditions less challenging compared to the previous report, especially in the areas of competing with other firms and winning new business. 8 6 55 57 57 63 55 5 4 - -4 3 5-14 -17-3 -4-17 -22-1 -14-28 13-35 -27-41 -6-8 -1 Accessing capital Keeping expenses under control Keeping quality staff Finding quality staff Collecting invoices 8 6 4 - -4-6 -8-41 -33-43 -47-13 -59-25 -38-48 -5-48 -5-59 -66-67-65-5-64-6 -55-5 -57-6 -68-1 Competing with other firms Winning new business Negotiating price with clients Keeping staff fully utilised 7
COMMBANK LEGAL MARKET PULSE QUARTER 4 14/15 financial performance revenue change FY14 to Overall, current revenue for both top and mid-tier firms is slightly higher compared to this time last year. 1 8 6 4 - -4-6 18 39-15 -21-7 2.8 17 5 5.5-33 2 18 36-1 -27-9 -8-1 The same as last year Current revenue under by more than 1% Current revenue over by %-1% Current revenue under by -1% Current revenue over by more than 1% Mean % 8
COMMBANK LEGAL MARKET PULSE QUARTER 4 14/15 budgeted and actual revenue results firms are more likely to miss their revenue budgets compared to top-tier firms. 1 8 6 4-4 4 8 27-4 -27-1 4.9-4 -2.4 1 29-3 -24 1 Average % -4-6 -19-8 -24-1 -1-8 -1 - Over budget by more than 16% Over budget by 11%-15% Over budget by 6%-1% On budget Over budget by %-5% Under budget by %-5% Under budget by 6%-1% Under budget by more than 16% Mean budgeted and actual expenses results Most firms have managed to control their expenses during and are tracking on or below budget. 1 8 6 4 1 - -4-6 -8-1 8-3 -35-15 -8-4 -3.9 - -4.7-4 - 5-3.8-33 -33-19 -1-1 - Average % Over budget by %-5% Under budget by %-5% Under budget by 6%-1% On budget Under budget by 6%-1% Under budget by more than 16% Mean 9
COMMBANK LEGAL MARKET PULSE QUARTER 4 14/15 Forecast for EBIT margins in FY16 Overall, law firm leaders forecast a slight increase in EBIT margins during FY16. 1 8 6 4 - -4 1 45-31 -14 3.6 14 43 5.5-43 2 9 45-27 -18-6 -8-1 Increase by more than 1% The same as last year Increase by %-1% Decrease by by -1% Mean % 1
COMMBANK LEGAL MARKET PULSE QUARTER 4 14/15 Revenue predictions Changes in revenue over the next 6 months by location Melbourne and Perth based top-tier firms are the most optimistic about positive revenue changes over the next six months. 1 8 6 4 1 1 1 1 88 86 88 8 86 67 67 71 59 63 54 47 53 55 5 38 38 17 UK / Europe Asia Melbourne Sydney 1 8 6 4 - -4-6 -8-1 -1 5 33 25 67 6 5 33 29 35 29 29 21-8 - -1 5 Canberra Perth Brisbane Adelaide 14 1 11
COMMBANK LEGAL MARKET PULSE QUARTER 4 14/15 Changes in revenue over the next 6 months by practice area firms are forecasting greatest net growth across IP, M&A and corporate advisory, and insolvency and restructuring practice areas. firms forecast highest net increase across property, environment and planning, insurance and employment, workplace and OH&S. 1 8 6 4 75 67 57 6 6 62 52 5 52 52 5 54 47 5 43 43 46 33 37 32 33 31 33 25 17 11 - -4 Employment, workplace and OH&S Insurance Property, environment and planning Government M&A and corporate advisory 1 86 8 6 4 45 5 33 43 44 14 5 41 63 29 45 67 36 41 536 22 17 24 39 5 19 26 15 46 38 25 - -4 Construction, engineering and major infrastructure Competition, consumer law and trade prectices IT, telecoms and media Intellectual property Taxation 1 8 6 4 33 17 11 35 71 21 5 6 33 38 39 41 33 3 63 18 22 33 18 29 38 25 5 29 5 15 - -15-4 -6-43 -8 Insolvency and restructuring Other general commercial work Litigation and dispute resolution Banking and finances Energy and resources 12
COMMBANK LEGAL MARKET PULSE QUARTER 4 14/15 Realised rates Expected changes in realised rates next 6 and 12 months This quarter, forecast increase in realised rates is driven by top-tier firms. 3 2.9 2.9 Mean % 2 1.3.4 1.2.7.5 1. 1.4.9-1 -.5-2 -1.5 Next 6 months (compared to last 6 months) Next 12 months (compared to last 6 months) 13
COMMBANK LEGAL MARKET PULSE QUARTER 4 14/15 Expense and profitability predictions Changes in expenses over the next 6 months firms forecast a net decrease in expenses across all areas except IT hardware and software, and occupancy. Conversely, mid-tier firms expect expenses in IT hardware and software and occupancy areas to increase. 1 8 6 4 - -4-6 -8-1 21-17 3 34 14 41-3 33 21 23 24 14 35 32 21 IT hardware and software Occupancy Marketing and business development 3 4 3 9-13 -17-14 -14 Staff training and development 1 8 6 4 - -4-6 -8-1 17-1 -13-1 -14-9 -17-18 -28-29-27-28 -33-31 Library and knowledge management -57-57 Professional indemnity insurance Telecommunications -23 14
COMMBANK LEGAL MARKET PULSE QUARTER 4 14/15 Changes in staffing over the next 6 months firms forecast a net increase in partner numbers and a net decrease in paralegals and non-fee earning staff. 1 8 6 4 - -4-7 -33 39 27 27 31 36 35 25 3 27 31 17 17 17 17 23 14-13 -33 32-6 -8-1 -67 Equity partner numbers Fixed share / salary partner numbers Senior Associates / seniour lawyers (4th year+) Junior lawyer numbers (graduates 3rd Year) 1 8 6 4 - -4-6 -8-1 -18- -17-14 -14 - -17-31 -27-33 -3-38 -63 3 9 5-7 -38 Shared service staff numbers Secretarial and admin staff numbers Paralegals 15
COMMBANK LEGAL MARKET PULSE QUARTER 4 14/15 Change in operating margins over the next 6 months firm leaders forecast a significant decrease in operating margins, compared to their mid-tier counterparts. 1 8 6 67 4-24 13 1-13 18-4 -6-8 -1 16
COMMBANK LEGAL MARKET PULSE QUARTER 4 14/15 Competition from non-traditional (alternative business model) law firms Frequency of competition from non-traditional (alternative business model) law firms Of the three non-traditional law firms discussed with firm leaders, Advent Balance competes most frequently with traditional law firms. 1 9 8 7 6 5 4 3 1 13 17 49 4 33 38 4 5 Advent Balance Bespoke Law Plexus Somewhat frequently Rarely Almost never Never Expected competition from non-traditional (alternative business model) law firms - next 12 months firms forecast a greater level of competition from alternative business model firms compared to their top-tier counterparts. 1 7 9 8 37 7 6 5 4 3 56 9 25 41 75 5 1 25-3% 31-4% 41-5% 17
COMMBANK LEGAL MARKET PULSE QUARTER 4 14/15 Impact of alternative business model firms - next 12 months The majority of firms do not perceive alternative business model firms will have a great impact on their business in the next 12 months. Interestingly, one in three top-tier firms do believe alternative business model firms will have a positive impact on the Australian legal industry. 1 8 6 4 - -4 3 7-83 3.3 13 24-63 37.5-9.1-91 -6-8 -1-7 -9 Very positive Positive Neutral Negative Mean Entry of international law firms The majority of firms do not expect international law firm entrants to have a great affect on their business. However, approximately one in five mid-tier firms view their entry to the Australian market as a threat. 1 9 8 7 32 14 37 4 5 36 6 5 4 58 57 59 47 46 3 1 1 29 4 13 5 18 FY14 Positive / Very positive Neutral Negative 18
COMMBANK LEGAL MARKET PULSE QUARTER 4 14/15 Cessation of international law firm entrants Opinions are equally divided on whether or not entry of international law firms into the Australian market will cease. 1 9 8 7 6 5 4 45 26 86 33 29 5 5 25 5 18 3 1 29 14 38 3 25 32 FY14 Disagree / Strongly Disagree Neutral Agree / Strongly Agree 19
COMMBANK LEGAL MARKET PULSE QUARTER 4 14/15 Further information For further insights or information, please contact: Marc Totaro, National Manager Professional Services Mobile: 477 739 315 Phone: +61 2 933 194 Email: marc.totaro@cba.com.au Web: commbank.com.au/legalmarketpulse For media inquiries, please contact: Sarah Gibbons, Public Relations Advisor Phone: +61 2 9118 176 Email: sarah.gibbons@cba.com.au About Beaton Research + Consulting Beaton Research + Consulting is a full-service research firm which offers a full range of solutions for professional services firms, financial services firms and associations. Their expertise includes benchmarking, thought leadership, brand solutions, customised solutions and client satisfaction. Things to know before you Can: This report is published solely for information purposes. As this report has been prepared without considering your objectives, financial situation or needs you should consider the appropriateness to your circumstances and, if necessary, seek appropriate professional advice. This quarterly report has been prepared independently by Beaton Research + Consulting and is commissioned by Commonwealth Bank. The confidential online survey used to prepare this report was undertaken by Beaton Research + Consulting in April to June 15. The report is based on the views of 3 law firms across Australia. Any opinions, conclusions or recommendations are reasonably held or made based on the information available at the time of its compilation. No representation or warranty, either expressed or implied, is made or provided as to the accuracy, reliability or completeness of any statement made in this report. The project was undertaken in compliance with the requirements of ISO 252. Commonwealth Bank of Australia ABN 48 123 123 124.