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FY23 a year of ‘remarkable comeback’ for Aussie firms
Australian firms have weathered softening demand and rising expenses well, with increases to worked rates likely to continue to rise.
Jerome Doraisamy
Global content and technology company Thomson Reuters has released its 2023 Australia: State of the Legal Market Report, produced by the Thomson Reuters Institute. Financial metrics for the report were collected from 20 participating law firms in Australia, including some of the largest in the region by headcount. Global metrics were based on more than 230 firms, primarily located in the US as well as the UK.
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As previously reported by Lawyers Weekly, Australian law firms are weathering softening demand and rising expenses well, but declining productivity – together with headcount increases outpacing demand growth – are causes for concern.
Rising costs, by way of both direct and indirect expenses, outstripped revenue growth in Australian firms in the past year, with total expenses for the average law firm growing by 11.6 per cent in the past 12 months. Direct expenses were up 11.4 per cent in the last financial year, while indirect expenses are up 14.3 per cent, due in part to the cost of expansion and inflation on the bottom line for firms.
The report also found that, despite the long-term hurdles of expense growth, lawyers’ happiness, and the rise of AI, Australian firms have navigated recent turbulence well.
In FY23, Thomson Reuters outlined, Australian firms saw demand growth averaging 1.3 per cent year on year, bolstered by a 6 per cent surge in demand at the back end of the financial year, which offset the 3.4 per cent decline in demand in the year’s first half.
Worked rates (i.e., rates that clients agreed to pay) also grew by 5.3 per cent year on year, the report listed. Billing realisation versus worked rates, it noted, was 87 per cent.
So far, Thomson Reuters wrote, these rate hikes have not resulted in a significant trade-off for firms’ realisation.
“Leaving aside the outlier that was FY22, this year’s 87.1 per cent realisation against worked rates sits comfortably in the middle of historical norms, showing that the billing efficiency gains made during the pandemic have not yet slipped away,” it said.
If this performance continues, the global company submitted, it will only further support the rate hikes firm leaders have pushed over the last two years.
“As firms struggle against rising expenses, fees lost to realisation leakage will be sorely missed; however, the year’s results have so far continued to show that the upside to increased revenues far outweighs the downside to potential client pushback,” it outlined.
Thomson Reuters Asia and emerging markets managing director Jackie Rhodes said: “The 2023 financial year was a remarkable comeback story for Australian law firms, [which] managed to overcome a difficult first half and achieve positive growth in demand, ending the year near the profitability levels of last year.”
“Firms demonstrated resilience and adaptability in the face of continued economic recovery, inflation, and geopolitical uncertainties, leveraging technology and innovation to deliver value to their clients and stakeholders.”
