Conventional wisdom holds that the legal market is getting more competitive. Between the rising number of law schools, shrinking budgets and technology disruption, getting a job as a young lawyer is seen as more difficult than ever.

Yet despite valid concerns over the current oversupply of law graduates in the market, there is another somewhat opposing issue that seems to be flying under the radar: the gap in the market for mid-level lawyers.

Within the legal market, there is a shortage of lawyers with three to five years’ experience, particularly in transactional practice areas.

This has been caused by multiple factors, mostly stemming from the global financial crisis (GFC).

The GFC caused markets to crash, sending demand for transactional legal services down with it. Businesses lost confidence, they stopped making purchases, beginning construction, or doing deals, and interest in the associated legal services dropped dramatically.

Now, as the Australian market recovers, demand has bounced back – but lawyers are nowhere to be found.

Taylor Root Australia manager Matt Harris says he has never seen such high demand partnered with such a low supply of candidates.

“We’re now in a fairly extreme situation whereby almost all of Australia’s major law firms, major top-tier and major mid-tier firms are all recruiting for the same thing simultaneously, and that is transactional lawyers,” Mr Harris says.

“Around 2011/2012, the market crashed in some respects and all recruitment in those areas ceased. Then at the end of 2014 everyone switched the lights back on, demand increased immediately overnight, but unfortunately supply is nowhere near meeting demand.”

Graduate cuts

The GFC had several flow-on effects that contributed to the lack of mid-level lawyers in the market. Firstly, graduate programs were ceased across the board, particularly in transactional practice areas.

“Most law firms stopped hiring and growing junior transactional lawyers when the teeth of the GFC really began to bite between mid-2011 and early 2014,” Mr Harris says.

“There was very little transactional work being undertaken and the firms simply stopped investing in that sector of the market.”

According to Mr Harris, banking, corporate, real estate, projects and infrastructure work were hit the hardest. Now, these industries are faced with a hole in the market around the four-year mark, reflecting that era of uncertainty.

Legal People consultant Sharon Henderson reflected Mr Harris’s thoughts, predicting the effects would continue to be felt for decades.

“What we’re seeing is a real skill shortage, particularly around that sort of three- to six-year mark, and I think that’s off the back of firms cutting their graduate intake during [the GFC], which has created this permanent black hole in legal talent that we will forever see at that level,” Ms Henderson explains.

In her view, highly specialised transactional areas are even worse off.

“Particularly in areas where it’s a bit more niche, such as banking and finance, and front-end construction and competition, the teams tend to be smaller than your bigger areas like general commercial or general commercial litigation, for instance, so they tend to take on less people in those teams anyway,” she says.

“But what the firms started doing [during the GFC] was either not allocating a first-year lawyer into those teams, or allocating one instead of two or three that they would typically do so it just created this permanent shortage of quality candidates in those areas.”

Herbert Smith Freehills HR director Andrea Bell said that the firm is seeing the post-GFC gap first-hand as levels of work increase.

“Across the legal profession there appears to be a general demand for transactional lawyers including corporate, banking and projects lawyers,” Ms Bell says.

“In the corporate sector we are seeing high volumes of M&A and foreign investment, driven by the low Australian dollar and low commodity prices, creating significant demand for M&A and capital markets lawyers.

“There is also a significant number of government infrastructure development and privatisation programs underway, or slated for later in the year, which creates a greater need for transactional lawyers such as corporate and project finance lawyers.”

Sideways pull

The GFC was the most widely publicised event that had a clear impact on graduate numbers. Yet Brian Ward & Partners managing director Philip Gleed believes a more subtle shift is also at work. Increasingly, firms now prefer lateral hires to graduate recruitment.

“Traditional employers – whether they are top-tier, mid-tier or boutique – their numbers have slowed down in terms of graduate positions, and the consequence flows on many years on,” Mr Gleed says.

“There’s a dearth of those mid-level lawyers in the corporate and M&A space because traditionally that’s a space where there’d be more engagement of these graduates when the market is strong.

“Even if the market has picked up over the last couple of years, or at least reinvented itself, we don’t seem to have the available talent because they didn’t come through the training pool half a dozen years ago.”

In Mr Gleed’s view, recruiting and retaining graduates is seen as too much investment of time and effort compared to lateral recruitment.

“The availability of graduate positions relative to all of the activity that goes on with lateral recruitment at a higher level is of concern,” Mr Gleed says.

“The market seems to be very focused on lateral recruitment at the expense of the traditional model which was to bring people up through the ranks by offering them graduate positions and training them well and then trying to retain them.”

According to Mr Gleed, that strategy is being embraced by many of the emerging national mid-tier firms which have a very heavy focus on lateral recruitment as a means of securing revenue.

“During the GFC there was a nervousness to commit to graduate recruitment because firms couldn’t supply the work to train new graduates, but post-GFC the appetite of firms to recruit at graduate level has increased,” he says. “But that appetite is being steamrolled by the appetite and willingness of the fast expanding firms to do lateral recruitment.”

International leak

These previous trends account for the low number of lawyers coming through the pipeline. But even those lawyers who are at around three to five years’ PQE are dropping out of the Australian market – international destinations are proving a tempting lure. Many lawyers have a desire to work abroad at some stage, and want to do so while still young, Mr Harris warns.

“One of the biggest issues facing the local market is the ongoing brain drain as domestic lawyers are tempted away to firms overseas able to offer international work, exciting travel opportunities and, due to the exchange rate, much higher relative earning potential,” he says.

The London, US markets and Asian markets have all picked up and are incredibly buoyant right now, according to Mr Harris.

“As a rite of passage most young lawyers want to spend some time in an overseas jurisdiction but they’ve been unable to do that for the last few years because those markets have been very quiet,” he says.

“Those markets have now thrown their doors open and you almost get one window of opportunity to go and do your stint in London or do your stint in New York. Those markets are crying out for Australian lawyers and a lot of Australian lawyers are leaving the country to go and undertake those opportunities all at the same time.

“A generation of transactional lawyers are leaving Australia at the moment.”

In Ms Bell’s experience, lawyers at this stage of their career commonly begin to reflect on their careers and aspirations and make career or lifestyle changes.

“Many will pursue opportunities to work overseas – heading to the UK, Asia or US to gain international experience while they can,” she says.

“Some lawyers may decide to go in-house; contemplate joining the bar or decide to take a career break possibly to start a family; while other lawyers may decide to leave the law to pursue other personal or professional endeavours altogether.

“As a result of all of these factors, we tend to see natural attrition across the sector in Australia at this level and consequent gaps appear.”

Those left behind

With such a small number of suitable candidates, firms have had to squeeze more out of what lawyers they do have and find innovative ways to get the work done.

“In my experience [firms are] squeezing the lawyers they do have harder. It’s commonplace to hear of lawyers, entire teams sometimes, being at 110, 120, 130 per cent utilisation,” Mr Harris says.

Ms Henderson believes many firms have been trying to make do with the people that they have, and not over-recruiting in relation to the amount of work they have coming in the door.

“They’ve been very conservative in terms of monitoring work and making sure that if they go to market and look for a new person that they’ve got a sustainable work flow coming through,” Ms Henderson says.

“They’ve worked a lot of their lawyers quite hard for quite a while and now they just don’t have the internal capacity anymore so now they’re going to market.”

Since the GFC ended, Ms Henderson has witnessed a change to the graduate intake numbers, contrary to Mr Gleed’s belief that firms are more focused on lateral hires.

“In terms of firms addressing it now, they’ve really looked at their graduate intake going forward for future years, and we’re also finding that they’re retaining more graduates than, say, two to three years ago,” she says.

“So they’ve increased their intake again after reducing it quite dramatically post-GFC and their retention rate of graduates is a lot higher.

“They’re obviously addressing that workflow issue and trying to place as many of those graduates into permanent ongoing roles once they become admitted as lawyers.”

The shortage of available talent may also be encouraging firms to become more flexible when hiring, Ms Henderson observes.

“If [firms] know that they might not find someone who has the exact experience but are coming from a transferable area, then they’ll start to look at that as well because otherwise their vacancies can be left unfilled for months and months,” she says.

“For instance, a competition role, if it’s got quite a strong litigation focus, they would look at a commercial litigation lawyer who is happy to have a focus in competition work. Or for banking and finance they might look at a property lawyer, particularly if it’s a project-based banking and finance role or even a commercial lawyer who wants to transition into banking and finance.

“Certainly some firms are being more flexible than others in terms of trying to broaden the candidate pool that they can look at.”

As a global firm, Ms Bells believes Herbert Smith Freehills can be more flexible with its talent pool and sharing of resources across offices, which softens the pressure slightly.

“Our priority is always to ensure that we have the right number and mix of lawyers to deliver for our clients,” she says.

“We have very strong and robust teams of lawyers across all of our practice groups; however, on occasions where demand does exceed resources, we are well placed to manage the issue by drawing on the strength of our national firm where we can draw from across our full range of practice areas.”

Lawyers within Herbert Smith Freehills can also draw on its global network where appropriate, giving them an advantage over national or boutique firms.

“We can call on the resources of our successful alternative legal services offerings located in Belfast and Perth to take on some types of work, such as document review and other due diligence, to help service our clients as effectively as possible,” she says.

In demand

Lawyers at this level who do work in these practice areas find themselves to be a sought-after commodity. While they are being worked hard, they are also being well looked after.

“The transactional lawyers that do exist at this level are a precious commodity and the firms recognise this,” Mr Harris says.

“Huge efforts are being made to retain junior transactional lawyers as they’re so hard to replace. They’re being very well looked after from both a career opportunity and financial perspective.”

While firms put in a lot of effort to retain these lawyers, rival firms also put in a lot of effort into recruiting them. The difference in salary opportunities is often the breaking point.

“The challenge facing the firms is that whatever they can offer their own staff to stay will often be trumped by what another firm can offer to tempt them away,” Mr Harris says.

“Firms can’t offer wholesale rises beyond about six, seven, eight per cent, yet a predatory firm won’t think twice about offering 15-20 per cent more to attract one key individual at the moment.

“We’ve seen candidates with valuable skill sets, rare candidates, moving from firm A to firm B in some cases pick up even 30 per cent increases on their current salary by moving firm. So there’s the opportunity of the raise you could secure by changing firm.”

Mr Gleed suggests lawyers within these gaps may be in a strong bargaining position.

“If you’re a good mid-level corporate lawyer, at the moment you’re much in demand. From the recruitment side, people are offering them remuneration that is very competitive in order to secure their services,” he says.

“So to some degree high-quality, mid-level corporate lawyers can demand a salary far higher than it otherwise was because of the dearth of those sorts of lawyers at the moment.”

But it’s not all about salaries, according to Ms Henderson. She says if firms truly want to retain their mid-level transactional talent, they’ll have to not only offer generous remuneration, but also provide career progression opportunities.

“Firms really need to be mindful that they engage, obviously with all their employees but particularly with those in specialised areas,” Ms Henderson says.

“They need to make sure that they’re looking at career progression opportunities and development opportunities for them and really engaging them so that they retain them. I’m sure they’re getting approached quite frequently, whether it’s through recruiters or directly by other firms or through their networks.”

Meanwhile, Ms Bell believes global firms are better placed to offer lawyers attractive career opportunities than national and boutiques, which can help overcome the trend of lawyers leaving the firm to move overseas.

“Our size and global reach allows us to provide our people with exceptional career development opportunities from early in their careers,” she says.

“For instance, our lawyers have the opportunity to gain international experience through our successful global secondments program.

“It is these professional opportunities that we are able to offer as a global firm, combined with our team-focused, collaborative and innovative culture that helps us to attract and retain talented and engaged lawyers.”

For lawyers in more crowded practice areas, Ms Henderson suggests that now may be a good time to consider re-specialising in the transactional space.

“From a candidate’s perspective, if they’re in an area right now where there’s an oversupply of candidates – I would [say] general commercial litigation is probably one of those areas right now – if they’re happy to consider broadening their specialisation, that would probably help in their search to secure a new role,” Ms Henderson says.

“The more open they keep their career options, the easier it will be for them to secure a new position and then it really comes down to how open the law firm or the future employer is, because some are certainly more forward thinking than others.”

The next gap?

Of course, hindsight offers 20/20 vision – but peering into the future, that vision is distinctly less clear. Ms Henderson is of the opinion that trends happen in the market and demand for specific legal services ebb and flow over time.

While she acknowledges that the areas in demand are ever changing, fortunately she doesn’t foresee any future gaps of this intensity occurring again.

“I’ve been a legal recruiter for 15 years and you see these sorts of trends happening,” she says.

“For the whole of 2015, it was definitely more the transactional areas that were really popular, but now we’re starting to see that slow down a bit and now the litigation roles are coming back.

“A lot of the demand in the last couple of months has been litigation-focused, being insurance litigation and commercial litigation, so the shift and the focus changes.”

A new area where demand is outstripping supply in is sophisticated estate planning.

“Another area which has cropped up a bit recently where you traditionally don’t see a huge demand for has been in the estate planning area,” Ms Henderson says.

“That’s not your traditional ‘mum and dad’ wills preparation and probate; it’s more that sophisticated succession planning advice and asset structuring and advising on setting up SMSFs. That seems to be a growing area for quite a while, and again it’s hard to find the candidates in those areas.”

Mr Harris also believes the market is fairly balanced.

“It seems currently that all practice areas are being buffed, grown and developed, and right now there are no identifiable sectors of the market that are looking to be the next black hole,” he says.

“For a time, litigation, in all its forms, was lower down on the list of priorities than hiring transactional lawyers but this has changed in the last six months.”

Mr Gleed suggests that with the property and construction boom, there is an increased demand for lawyers in that area also.

“Traditionally property hasn’t necessarily been an area that has attracted younger lawyers, but with the upsurge of infrastructure projects that seems to be something that’s supplying a lot of legal work at the moment,” he says.

“So there’s potential for younger lawyers to move into the property and infrastructure space.”

Ms Bell, on the other hand, points to a shift in focus to legal practice management, which Herbert Smith Freehills is focused on.

“While I don’t think there are necessarily any areas that are being overlooked, with an eye to the future, I think it’s safe to say that there will be an increase in the need for individuals with legal project management experience and the continued evolution of technology-enabled client service delivery,” she says.

“We will continue to invest in these innovative and sophisticated solutions for the benefit of our clients and expect that other firms will follow suit. Therefore, it stands to reason there may be opportunities in these areas in future.”

Note: The print edition of 'The Black Hole' incorrectly titled Philip Gleed as the director of Gleed Legal. Mr Gleed is the managing director of Brian Ward & Partners.