Results from the 6th ALPMA/Crowe Horwath Financial Performance Benchmarking Study of Australian law firms
A new study of Australian law firms suggests the profession has moved on from a period of consolidation and profit protection in the previous twelve months to a position where they are both expecting and planning to increase rates of full time hires and elevate more lawyers to partner positions.
“75 per cent of all firms surveyed reported they expect to hire more fee earners in the upcoming financial year however the lead reason for this intention was the replacement of exiting staff followed by planning for and accommodating growth,” said Crowe Horwath Partner, Business Advisory, Andrew Chen.
“Average revenue per partner increased across all sized firms with the exception of the $20+ million annual fee band. Firms in the fee band of $5m – $10m pa had the largest increase in per partner earnings on the previous year whilst firms with annual billings of less than $5m had the highest expectations of revenue growth, projecting an average revenue increase of 17% in 2016,” Mr Chen said.
These findings are part of the annual benchmarking study of the profession undertaken by leading accountancy firm Crowe Horwath in partnership with the Australasian Legal Practice Management Association (ALPMA). Legal firms from all states in Australia participated in the annual benchmarking study
Disruption. What disruption?
“Whilst disruption is widely acknowledged as a critical issue for law firms to address, the survey found law firms were not making any radical changes in this regard,” said ALPMA President and Financial Controller at the Lantern Legal Group, Mr Andrew Barnes.
“They are adapting, as a conservative profession could be expected to do, but doing so cautiously.”
The survey found the principle response to external changes was to seek to develop internal efficiencies, focusing on costs they can control. At some point, Australian firms will have to future-proof themselves by looking beyond internal solutions,” Mr Barnes said.
Marketing expenditure static
“I was surprised to see there was no discernible move to increase marketing and business development budgets in response to external factors, with the average spend on these activities stable at around an average 2 per cent of revenue across all firms
“Digital marketing allocations continue to be modest, with firms spending around 15 per cent of their marketing budget on this activity. The small firms, those under $5million revenue pa, tended to be the biggest spenders in this category with digital market accounting for 22 per cent of their marketing spend,” Mr Barnes said.
Based on the current and past surveys, there appears a consistent practice to maintain gross profit margins at 60 per cent, with costs steady at around 40 per cent of revenue. Average overheads exclusive of rent were broadly consistent with previous years, being 34 per cent in the current survey verses 36 per cent in the previous period.
“In terms of partner remuneration, 47 per cent of firms indicated the current levels were not expected to change in the 2016 financial year,” said Mr Chen.
“Not surprisingly, a majority of firms nominated the retention of talented staff as a key contributor to financial success. Perhaps surprisingly, internal appointments to partner were only made for 45 per cent of the participating firms.
In terms of partner gender profile, of the total amount of partners appointed, 24 per cent were female, with larger firms, those in the $20m+ fee bracket, having the highest amount of female appointments to partners at 36 per cent of all appointments to the position,” he said.
Mr Chen said the financial resilience index for 2015 saw a modest decline from 2.69 in 2014 to 2.59, suggesting a very slight decrease in fees per dollar invested, though firm financial stability remains strong despite competition of economic conditions
Succession and success
The survey found most partners to be in the 40-50 year age bracket, with 69 per cent of firms revealing that they did not expect to see partners retire in the next 18 months.
“This aligned with the finding that 62 per cent of firms do not expect to appoint new partners in the next 18 months. We therefore conclude that most firms deem their existing partner structure to be suitable for the short-term, “Mr Barnes said.
According to Mr Chen, “indications are partners remaining on for financial reasons and/or reflection of limited succession options.”
The ALPMA Crowe Horwath Financial Performance Benchmarking Study uses Crowe Horwath’s proprietary benchmarking tool, Open Measures, to compare participating Australian law firms. This is the sixth consecutive year the study has been under taken with the aim to assess the financial shape of legal practices and help firms’ benchmark their performance to their peers.
Interested readers can download a free copy of the results summary report from the ALPMA website from Friday 4 March, 2016.
To obtain a full copy of the report please email Andrew Chen: firstname.lastname@example.org
About Crowe Horwath
Crowe Horwath Australasia is the largest provider of practical accounting, audit, tax, business and financial advice to individuals and small and medium enterprises from a comprehensive network of over 100 offices. The team includes approximately 3,000 principals, professionals and support staff located in Australia and New Zealand. Crowe Horwath Australasia was formally privatised and inducted into Findex on 6 January, 2015. Crowe Horwath International is ranked amongst the top 10 global accounting networks, and is known for delivering quality audit, tax and advisory services in more than 100 countries worldwide.
The Australasian Legal Practice Management Association, (ALPMA), is the peak body representing managers and leaders at law firms and legal departments. ALPMA provides an authoritative voice on issues relevant to legal practice management. ALPMA delivers a comprehensive professional development program for members, which includes the annual ALPMA Summit, regular practice management seminars across Australia and New Zealand, and the Leading Your Firm program for smaller and regional law firms, online resources and a comprehensive legal industry research program.
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