One of the benefits of writing an article at the end of the year is the opportunity to look back over the past 12 months and make some predictions about trends that will continue into the new year — hence the snappy title of this article.
2017 was a turnaround year in the Australian and New Zealand profession. Despite media predictions of doom and gloom, most firms, financially at least, had their strongest year for a long time. There is no one-size-fits-all reason for this, but a number of factors are at play. On a macro level, the economies of both countries are improving; on a micro basis, the tougher years have seen firms work hard to get their personnel structure right, which has reduced unnecessary costs and the resultant fiscal drag that occurs.
Turning to 2018, this is my prediction of what the next 12 months will look like:
Good firms of all sizes will do well financially. Demand is increasing and so are the key drivers of profitability — namely rates and hours.
In 2017, rack rates and realised rates for all categories of fee earner increased, and the margin between rack rates and realised tightened. This was possibly helped by the ‘bigger bastard’ theory where clients know (either through experience or osmosis) that other firms or a group of firms are charging a lot more. This applies to the total cost of matters, not just hourly rates.
For the first time in about 10 years, recorded hours have increased. I know mention of chargeable hours is anathema to many commentators, but it is still the predominant way of generating fees and is the best measure of utilisation within a firm.
With price and productivity increasing and a buoyant economy to operate in, 2018 should be a great year for good firms.
Personnel structure will continue to evolve
Leverage (the number of employed fee earners per equity principal) as a differentiator has almost disappeared. Clients are increasingly demanding senior lawyers do their work and they are prepared to pay for it. This coincides nicely with what senior lawyers want to do; after all, they trained to be lawyers not people managers.
I see the trend toward leaner teams continuing in 2018. For practices that do the high end complex legal work, these teams will be a cluster of experienced senior lawyers with very little leverage. The more commoditised work firms will make greater use of technology and contractors to ensure those people on the payroll are fully utilised. Gap filling by contractors will reduce the need for firms to have a large ‘standing army’ to cope with the peaks in demand.
More merger activity
There is interest at both ends of the acquisition/merger spectrum to do a deal where possible. Firms with an expansion mindset see acquiring a firm or practice group as the fastest and cheapest way to grow their business. They will usually have a support structure that can accommodate — both physically and managerially — an additional practice or two, which provides economies of scale.
At the other end, an acquisition or merger can provide a firm with a circuit breaker for some of their managerial challengers or deadlocks. This could be anything ranging from succession to disparity in contribution or a hollowing out of market share.
Cash payments for equity will become increasingly scarce
For firms of all size, a lockstep entry to equity is more common than dollars changing hands from the sale of equity between partners. Similarly, a merger is more likely than a trade sale between firms. There is a likely opportunity for the partners in a firm being acquired to earn more in the merged entity, plus a one-off opportunity to realise the firm’s balance sheet.
Like most of the economy, sale of law firm equity is becoming a buyers market.
Genuine innovation remains on the horizon
Conferences will continue to be built around innovation, artificial intelligence and a general theme of ‘the machines are coming, so get on board now’. There is undoubtedly plenty of movement in this area but there are also limitations, least of which is widespread client acceptance. So the conference industry is safe for a few years yet.
All the best for the New Year! I look forward to what will be a prosperous 2018.