Private Practice in 2017 – 2018
The 2017/18 financial year has seen a strong financial performance from law firms, despite challenging operating conditions. As the Australian legal market continues to mature, growing revenue and profitability remains a key focus for most managing partners. Top-line revenue and profitability growth are driven by various innovation strategies, such as increased collaboration, technology, outsourcing, mergers and acquisitions and continued investment in competitive lateral recruitment.
Technology driving change
Technology and innovation was a key focus for many firms this year. Increased investment in this area remains distinct from the execution of New Law strategies, which seek to utilise technology more effectively. The implementation of New Law was less prominent this year with many law firms having already adopted the practices of these competitor
businesses, and in some cases collaborated with them to develop new, efficient ways to deliver legal services. Like their peers in the accounting and finance industries, law firms are now also seeking to diversify their client offerings, including establishing or acquiring consulting and project management arms. In 2018, the number of professionals employed to work in specialist innovation and operation roles in the legal profession grew substantially.
For example, Gilbert & Tobin collaborates with Legal Vision to manage routine work for corporate clients and offers fee certainty through a subscription model. The firm is also pursuing its own innovations to deliver lower-cost solutions to clients. Corrs Chambers Westgarth is collaborating with the University of Western Australia to develop applications for legal service efficiencies for not-for-profit clients. Mills Oakley has formed a partnership with Swinburne University of Technology to work on a project aimed at improving legal processes. Most firms have indicated budget spend on technology will continue to increase.
More firms are adopting artificial intelligence for greater analytics, improved reporting for internal and client work and to perform routine mundane work, such as M&A, due diligence and real estate contract reviews. Similarly, outsourcing by firms continued to increase this year, allowing lawyers to focus on their areas of specialisation and to maintain higher levels of profitability.
Technology has changed clients’ expectations of the work they want their lawyers to perform. Clients are now asking lawyers to provide broader, more holistic advice aligned to their commercial and strategic objectives. The big four accounting firms also continued their push into the legal services market. Their brand strength, client base and innovative, multidisciplinary services have enabled them to take market share from law firms. They distinguish themselves from traditional law firms by providing legal services as part of a holistic commercial offering that includes
tax, finance and governance.
The rise of alternative billing arrangements
Although many firms increased their fees this year, client pushback on fees was common as was client demand for more value, alternative billing arrangements and greater certainty around fees. Firms primarily used hourly billing although fixed fees and tailored value-adds increased. Negotiations around fees almost always resulted in discounting. Several firms reported being undercut in competitive bid processes, indicating work is still being undertaken at a loss to retain clients. Hiring of practice and project managers to manage pricing more efficiently and to provide more accurate budgets to clients increased.
Increased transactional activity this year resulted in more legal hiring. Activity was strongest in Sydney and Melbourne followed by Perth, Brisbane and Adelaide. Despite this, firms remained lean, and focused on staff utilisation. Hiring this year included a mix of permanent and contract hires to enable firms to respond quickly to changing business environments. Solicitors of three to five years’ post qualification education (PQE) and senior associates of five to eight years’ PQE continue to be in high demand by law firms of all sizes. While many firms have increased revenue in practice areas such as infrastructure, corporate/M&A, equity capital markets, finance, competition, employment and restructuring, overall revenue growth remained modest.
In a market where significant pressure on resourcing remains contrary to flat revenue growth, many firms have sought to adapt their resourcing model by introducing more flexible solutions. Alternative legal services providers have increased penetration of the private practice market and are seconding lawyers (particularly at senior level) to some of Australia’s largest domestic and international firms. The firms themselves have also increased the number of lawyers directly appointed on temporary or fixed-term contracts. While this more flexible resourcing model is not new, historically it has not been a prominent feature of the private practice market for cultural and practical reasons. Overall, this reflects a broader market trend of law firms becoming smaller and leaner in terms of permanent headcount; with the aim of being better able to adapt to changing market conditions and keep client fees steady while growing profitability. For example, recruitment of contract staff into law firms increased partly in response to the Financial Services Royal Commission and the resulting surge in demand for information and analysis.
Flexibility key to job satisfaction
Lawyers reported working consistently longer hours than in the past, with more juniors leaving after only two years in a firm in search of a better work-life balance. This has exacerbated the skills shortage and firms have responded in some practices (particularly corporate law and banking and finance) by offering large premiums to attract new staff. In 2018, this increase in departures combined with difficulty recruiting replacement solicitors meant many teams became smaller. Overall, this has provided an opportunity for younger lawyers to take on more senior work and responsibilities. This was appealing for most, provided they were given appropriate training and development opportunities and could achieve reasonable work-life balance.
In a bid to attract the best staff, firms emphasised their value propositions and policies around diversity and flexibility. Job sharing has increased, as more employers embrace the concept, and is popular with male and female lawyers. The resulting flexibility and talent diversity of lawyers is also attractive to clients.
For those opting out of the major firms, a career in-house is the most popular alternative. This year, more lawyers than the previous financial year have left law firms to pursue careers in-house or overseas and are doing so earlier in their legal career. Working in-house is recognised as being a more sustainable career choice than private practice in terms of demands, varied workload, career paths and worklife balance.
Recruitment and retention
Senior-level lawyers, namely senior associates, special counsel and partners without practices report that finding a new role in this market can be difficult. The senior job market for lawyers is not fluid and while some have found new roles, many have struggled and some have left practice as a consequence. Those who secured permanent positions often had to accept reduced salaries. A good number have had to work as contractors. Many lawyers have pursued further study to expand their skills to allow them to seek roles outside the law, with non-executive director roles, C-suite options, commercial and senior government roles preferred.
Retention of valued lawyers remains a crucial issue for law firms. Lawyers seek quality legal work, training and development, a career path, financial reward, recognition and a balanced lifestyle. While many firms can deliver on most of these aspects, worklife balance is the area where they often fall short of employee expectations, despite some firms offering flexible hours, reduced work days and some limited time off following major transactions.
Remuneration increases remain modest
Low remuneration increases for solicitors reflected a challenging, rapidly shifting business environment. Average salary increases nationally are around 2.5%, sitting modestly above CPI figures (1.9%). Some lawyers in hot spots of demand such as banking and finance, construction and infrastructure and corporate/M&A law achieved greater increases. Bonuses continue to be used as retention strategies along with laptops, phones and other offerings.
Lawyers with three to six years’ PQE in the major firms have achieved increases of around 3 to 5%, while outstanding performers in similar sized practices were awarded increases of up to 10%.
High-achieving senior associates in the same firms typically earned around 3% plus bonus. Bonus figures for this group can be as high as 20% of the base remuneration package but tend to sit more commonly at 10% of base remuneration. Bonuses are generally limited to senior associates who exceed expectations in fee generation, client attraction, management of matters and teams and the like.
Lateral partner hiring, acquisition of new practices and firm mergers remained prevalent features of the Australian legal market this year. Many firms aim to grow their market share by investing to acquire new practices or increasing the depth of existing teams.
Partners with practices and established teams were most highly sought after and are perceived as less risky in terms of integration into a new firm and client transitioning. In a six-week period to May 2018, Mills Oakley added five new partners to grow the partnership to 100 as part of a strategy to become a top-five Australian law firm. Hall & Wilcox in Brisbane acquired a team of 20 from DibbsBarker; and Dentons in Sydney acquired 18 partners from the same firm, resulting in the cessation of that practice. Mergers, acquisitions and partnership moves will continue in the Australian legal market for the foreseeable future.
Individual performance pressures
Managing the financial performance of individual partners remains squarely in focus for many firms, and the pressure for individual partners to perform continues unabated. Consequently, some partners feel disgruntled that individual benchmarks set by firm management are not realistic in a highly competitive market undergoing rapid transformation, and in circumstances where resourcing is lean (whether due to market conditions or a focus oncontrolling costs).
For these partners, the options are to change their equity status or move on to a more compatible environment in terms of performance measures, clients, work, pricing and culture.
Compensation remains a key issue for many partners. Consultation with partners regarding compensation has become more important than ever, particularly in firms with multiple offices. With firms now much more corporatised and centrally managed than in the past, partners are feeling more removed from decision-making. Some feel they are
not always heard; others feel ignored.
A decision in 2016 by the global management of Herbert Smith Freehills resulting in a 10% reduction of the Australian partners’ share of the single global profit pool agreed when Freehills and Herbert Smith merged had dramatic implications. The Australian Financial Review reported the firm has now overhauled this structure, but not before the loss of 20 partners to White & Case¹.
¹Revealed: Freehills partners dudded in global merger, Edmund Tadros and Misa Han, The Australian Financial Review, 1 June 2018
For key partners who are meeting their individual targets, this strong performance demands reward. Those firms who cannot reward high performers appropriately risk losing key partners and practices. This is an issue for even some of the largest and most successful firms, in which high-performing partners and practices may in some circumstances need to financially support niche or less profitable practices to provide the seamless service demanded by many clients. While many partners who made moves this year achieved a comparable guaranteed base to the compensation they had previously been earning, many firms offered a significant upside for exceeding benchmarks.
Senior associates and special counsel who have moved into partnership roles have generally brought a small client following, offering mid-size or boutique firms the opportunity to grow. The number of partners offered partnerships this year remained steady, however the path to partnership remains long, with many structural and situational challenges and high overall benchmarks. Bottlenecks in law firms and the inherent difficulties achieving partnership means many senior lawyers opt out of a career in private practice, which was consistent with trends in previous years.
Partnership remuneration levels have generally remained steady with slight increases in some firms although most firms reported a profitable year. However, profits were generally modest and relied heavily on the creation of efficiencies and, in some instances on reducing partnership numbers. Competition and business challenges resulted in several partnerships reducing partner compensation, while other partnerships reduced equity partner numbers to maintain overall profits and thus retain valued partners.
Corporate in 2017 – 2018
Expansion and creation are the key themes for in-house law this year. In-house legal teams have grown to meet the needs of their corporate clients in a business world that is more heavily regulated than ever before and feeling the pressure to reduce spending on external advisors.
Overall Mahlab reports at least 10% growth in existing legal functions, ahead of most law firm growth. The Financial Services Royal Commission has necessitated additional recruitment of contract staff into law firms and financial institutions alike as they grapple with the demands of a ‘fast and furious’ commission process and requests for information and analysis going back years.
This growth manifests across all industries, most notably financial institutions for the reasons above but also professional services, digital, and construction and infrastructure.
At the same time, legal teams have also expanded at state level across government departments and agencies (especially in Victoria) and, at Commonwealth level, in the regulators.
Rise of the in-house function
Recruitment into existing teams tends to be at the three-to six-year post qualification experience level, as in previous years, with more senior recruitment trending upwards. Competition between in-house employers is very strong: a fourth-year commercial lawyer with good training and experience and the right attitude is likely to receive multiple offers if they put themselves on the market. Senior associates and senior legal counsel are also in demand for established legal teams in the private and public sector.
An exciting development this year is the increase in the number of internal legal functions created. These ‘greenfield sites’ open opportunities for more experienced lawyers to establish and develop a legal function in their own likeness, educating the business about the function, and how it can add value to the business and save money.
As for growth of an existing function, increased regulation and cost are the main drivers for this decision, with boards of listed companies particularly keen to have the governance framework and protection that an internal legal function provides. Other companies make the decision to employ when faced with a major change in their environment,
such as an IPO, takeover challenge, major litigation or significant event on the horizon such as a capital raising.
Overseas investors often look to the general counsel as an essential member of a senior leadership team and query why this role does not exist. More Australian companies respond to this by going to market for the first time to establish the legal function.
We have seen no legal function being abandoned, except in obvious circumstances such as a takeover or liquidation.
The search for cost savings and greater efficiency
While the in-house sector enjoys a climate of growth, general counsel are still constantly looking for ways to save money. This impacts their relationships with law firms: pressure to price on the deal rather than hourly rates; ‘bulk’ discounts and reduced fees for standard work; value-add services such as legal education; and availability of secondments (into the law firm as well as the more usual secondment from law firm to corporate).
Use of contract labour continues in the in-house market as law firms increasingly push back on seconding their best lawyers to the client and permanent head count pressures subsist within companies. Many contracts run for more than 12 months and some convert to permanent hires, the terms of the engagement permitting. Similar to last year, more law firms are offering this service to their clients, with some firms bundling secondment into their panel arrangements with corporate clients.
The use of technology by in-house lawyers continues. This is a significant trend and area of innovative development for lawyers working in the corporate sector. More funds and resources than ever before are being directed to support in-house legal teams with technology. Lawyers are taking advantage of automation, AI and for some fortunate legal teams, building their own bespoke platforms.
Companies are also briefing the Bar directly and we see this trend increasing. Outsourcing to offshore providers for routine matters continues, although this tends to be arranged via a law firm.
Remuneration and incentives
Remuneration has not increased markedly, with most organisations sticking to CPI or a little above (around 2.6%) and rewarding their staff through shortterm incentive (STI) and long-term incentive (LTI) arrangements.
STIs can run as high as 50% of base salary for senior practitioners, while STIs for junior lawyers generally sit at 5 to 10% of base salary. An STI target of 10 to 20% applies to team members at mid level although much of this is still dependent on company performance. This year, an increasing number of in-house counsel report their STI is pretty much‘ guaranteed’ as it is a substitute for a more generous pay increase. In this way, the company aims to ‘pay market’ without raising the salary component.
LTI participation tends to favour general counsel and deputy general counsel operating at executive level. They tend to be more common in ASX-listed entities. These incentives tend to be linked to the value of shares upon commencement, with the number of shares matching the base salary at the available percentage (usually 30 to 50%).
Recent adverse publicity about bonus schemes for general counsel at the major banks may temper the inclusion of senior legal staff in such programs in the future¹. Government remuneration still lags behind private enterprise but has caught up a little. The benefits of a government role often outweigh the lower salary in terms of interest and quality of work, work-life balance and responsibility. A relatively junior lawyer in government can find themselves handling complex, sensitive and important matters not available in a corporate setting or in a law firm. In addition, roles often offer a significant people management component.
¹Bonuses for in-house counsel face scrutiny, Misa Han, The Australian Financial Review, 18 May 2018
Satisfaction key to retention
Retention is not a major issue for general counsel, provided the benefits of the in-house environment remain: a balanced approach to work, some flexibility of hours and work arrangements, exposure to the business, interesting and good quality work and professional development opportunities. A lawyer might move to a more senior role in another company, or in order to experience a new industry. Others move within their company, trying non-legal roles such as product development (especially where the product is closely aligned to the law, such as in financial services) or strategy. More rarely, a lawyer may return to a law firm.
Job satisfaction remains high for in-house lawyers. General counsel are keenly aware of the motivation of lawyers leaving private practice for the corporate sector and work hard to ensure their expectations are met. While there are occasional grumbles about resourcing, induction, training and even the office layout from new recruits, most lawyers adapt well to life outside a law firm and comment that they would never go back.
Dissatisfaction arises where the legal function has become removed or distanced from the business for some reason, where an excess of bureaucracy cripples decision making or where the legal function has become a post box to external firms. An effective general counsel, working with a CEO and board that respects the function can usually remedy these ills unless the company as a whole is suffering from malaise. A drop in morale across an organisation naturally impacts its lawyers – as does a downturn in business and increased regulatory scrutiny.
The outlook for the in-house legal market is very positive. The internal legal function is well entrenched and is enjoying a major upswing, expanding at a rate not seen since pre-GFC days.
Increasing demand for company secretaries
A career as a governance professional continues to be a very viable and attractive alternative for lawyers. Every year we see increasing demand for legally qualified company secretaries and governance professionals, particularly in the ASX-listed space.
From a career perspective, the relatively predictable rhythm of the work appeals to many lawyers, as does the opportunity to work closely with the chair and board and see the machinations of the boardroom first-hand. As in previous years, the role is often combined with compliance and risk functions as well as the senior legal (general counsel) role.
Secretariats continued to grow this year, albeit not as much as the corporate legal function. Mahlab reports a 5% increase in legally qualified staff joining existing teams – a sizeable rise in what is traditionally a stable sector. Despite increased use of technology, organisations may find themselves unable to manage an expanding compliance burden. Those regulated by ASIC and APRA are under considerable compliance pressure, especially in light of the Financial Services Royal Commission and the expected tightening of compliance standards once its work is completed.
For some lawyers, working in the company secretary space is a precursor to building a non-executive director portfolio. The opportunity to see seasoned board members in action in the boardroom can be invaluable.
Legally qualified company secretaries continue to pursue further professional development opportunities, including undertaking the Governance Institute of Australia course, which is highly regarded. Salaries have risen hand in hand with in-house legal remuneration, with a national average of 2.6%.