Legal Practices Survey February 2016

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Contents Executive summary

1

Highlights

2

Structure, outlook, profit and revenue

3

Staffing, remuneration, utilisation and WIP

5

Outsourcing

6

Fee structuring, new matters, source of work and digital strategy

7

Challenges and succession

8

About Pitcher Partners

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Engaging Pitcher Partners to perform the finance function provides me with the confidence and peace of mind that the Foundation’s financial management is under control and allows me to focus on the strategic direction of the Foundation. I have found the staff professional, friendly and committed to providing the best quality of service. The team at Pitcher Partners has surpassed all of my expectations and I highly recommend them. Stephanie Copus-Campbell // Executive Director // Harold Mitchell Foundation

Executive summary Pitcher Partners Melbourne recently conducted a Legal Industry Research Survey as part of our benchmarking research project. The survey was designed to gain further insight about: The way firms in Australia are organised and operate Firm’s financial performance and indicators from the 2015 financial year Key industry themes, challenges and opportunities Strategies for succession, practice exit and value maximisation Non-financial drivers affecting and enabling firms to succeed and grow

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Highlights This year’s survey confirmed many of the major themes affecting legal firms: • Revenue continues to slow. This will affect profitability and require some smarter thinking about marketing and digital strategies. • Staff remain a major cost, which means utilisation as well as pricing need to be a key focus. • Outsourcing is becoming more popular, but those who have not considered it yet have no plans to in the future, perhaps widening the gap between innovative and other firms. • Succession is a major issue, with almost half the practices having an average equity partner age over 51 but only a third having documented succession plans. Business confidence and pricing pressures continue to affect the demand for legal services leading to a continued slowing in revenue growth. Declining revenue and profitability are predominately due to ongoing fee sensitivity with clients seeking value for money. Growth in revenue generation will be an ongoing challenge for many. Firms focusing on core strengths and niche services at value driven prices will continue to prosper, along with those who clearly understand the origins of new work and can effectively price each engagement. We expect professional wage costs will continue to remain flat in the short term, but practices should continue to focus on, and invest in, how they attract and retain quality staff. Outsourcing is becoming more popular in the legal industry. Firms need to understand how competitors are utilising these services to establish or maintain a competitive edge and commit their time to services more highly valued by clients. Firms will need to understand signs that their digital strategy needs attention and that an effective strategy can enable new ways of competing in the market. Succession planning should be a key business and industry focus. Our comprehensive research on succession planning indicates a majority of business owners are planning to retire, but very few are organised enough to have a documented plan as to how to get there.

Succession planning should be a key business and industry focus. Our comprehensive research on succession planning indicates:

80%

of business owners intend to retire in the next

10 years

75%

of all owners do not have a documented succession plan

Survey respondents supported this finding with only 34% (2014:37%) indicating they have a documented plan in place – despite the fact that 48% (2014:50%) of firm partners’ average age was 51 years or older.

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Structure, outlook, profit and revenue 3%

7% 21% 30% 42%

Annual budget

Structure

49% 14%

Sole trader

Partnership (with or without service trust)

Outlook on fees 2016FY

55%

79%



Complete an annual budget, and track to budget

Grow

Don’t complete an annual budget

Decline

Neutral

Corporate Other

Uniform pricing Effects on business

42%

39%

24%

12%

No effect Increased administration time Costing/quoting challenges Decline in margin/other Fee quote procedures

53% Partner by partner basis

25% Managing partner sign off

Focus on cost wastage rather than cost reduction Growth driven by knowing why customers are buying

22% Pricing committee/other

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Revenue and profitability Average professional fees per Equity partner

$827,066

Average Gross Profit per Equity partner

$644,605

Average Net Profit per Equity partner

$189,304

Net profit as a % of professional fees: 2014

23.30%

2015

22.89%

Participants in our survey were generally smaller practices, revenue $5m professional fees

$2.5m-$5m professional fees