Law firm profits surge as survey reveals robust client demand and margins

Law firm profits surge as survey reveals robust client demand and margins

Photo: Marten Bjork, via Unsplash.

Four in every five Australian law firms are reporting profit margins of more than 10 per cent, compared to just over half the industry hitting this benchmark in 2019.

Following a survey of 185 legal firms nationally, Macquarie Business Banking’s 2024 Legal Benchmarking Report has revealed strong performance for the sector with increased revenue and profitability across the industry with almost all respondents reporting a profit.

Amidst robust client demand as the strategic importance of legal firms continues to grow, Macquarie Business Banking's national head of legal Matthew Bolle says astute technology adoption and scaled growth strategies have also helped propel and sustain strong financial performance.

"As the landscape continues to evolve, we see significant opportunities emerging for firms to capitalise upon their position as trusted advisers, with work expected to expand in key practice areas,” Bolle says.

“Clients are increasingly seeking advice in areas such as technology and innovation, restructuring and insolvency, mergers and acquisitions, and environmental, social and corporate governance.”

Of the firms surveyed, 43 per cent reported an annual revenue of more than $5 million, 35 per cent were in the range of $5-20 million, and 22 per cent reported revenues of more than $20 million.

Bolle explains that amongst the larger $20 million-plus firms there is also a strong appetite for taking on debt, with almost three in four having a debt limit of greater than 0.5 times their profit, thus enabling them to fund growth initiatives, execute succession plans and enhance scalability.

"By leveraging their balance sheet, firms are able to invest in technology, build capacity and commit to new practice areas, strategically utilising business assets to drive capital investment and scale, sidestepping the challenges associated with incremental growth, such as resourcing issues, technology implementation and inconsistent client experience,” Bolle says.

"Firms navigating the balance between calculated risks and strategic investments are well-positioned to not only weather uncertainties, but to thrive. Key considerations to embrace change and seize opportunities include a clearly defined strategy with decisive action, resourced effectively."

In line with the industry-wide focus on productivity and growth, many firms are investing in technological innovation, with artificial intelligence emerging as a key accelerant for research, due diligence and business development.

“Larger firms reported a significantly higher integration of technology tools in their everyday operations, resulting in almost 80 per cent higher revenues per full-time equivalent team member compared to smaller firms,” Bolle says.

Nonetheless, profit margins have improved substantially across the board with 80 per cent reporting net profit margins exceeding 10 per cent in FY23, compared to 56 per cent of respondents in 2019. More than one in three respondents have seen margins greater than 30 per cent.

The report points to four key differentiators for more profitable firms, including higher revenue per partner at $3.2 million versus $2.1 million for others, salaries as a lower proportion of revenue at 21 per cent versus 36 per cent, leaner headcounts, and lower debt limits as a percentage of profit.

Bolle says the report highlights a persistent concern among firms regarding attracting, retaining and rewarding key talent, with people and staffing identified as a key business challenge by 85 per cent of the firms. 

"The findings indicate that high performing firms achieve greater revenue and profitability while maintaining a more efficient salary spend, allocating a third less on salaries compared to other firms and employing two-thirds fewer staff,” Bolle says.

“This efficiency is attributed to a higher ratio of fee-earning staff, strategically positioning support roles equipped with advanced technology and resources.

“Improving the efficiency of support staff allows firms to assist a greater number of fee earners, which can drive higher levels of profitability in turn.”

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