What Australia’s disappearing middle means for the legal market

There’ll be a “proliferation” of small or boutique firms, with one or two partners; “they’ll be very specialised niche offerings, almost no back office at all, maybe a secretary and a laptop and off they go,” he suggested, and at the other end of the spectrum, “there’ll be a lot more acquisitions, a lot more global alliances” between larger law firms.

Humphrey’s supposition rings true when observing firm developments in the past year or so. We’ve witnessed a bounty of boutique firms being launched across the country since the start of the year, including numerous practices launched by former BigLaw partners, and at the big end of town, the mergers between Herbert Smith Freehills and Kramer Levin, Ashurst and Perkins Coie, and Allen & Overy and Shearman Sterling the prior year all speak to a trend towards more global behemoths (the recently announced decoupling of King & Wood Mallesons bucks this trend, of course). There has also been a proliferation of national practices snapping up smaller market players.

Such an “hourglass effect”, as Humphrey put it, means that mid-market practices “need to figure out how they will attract and retain their talent”.

“When you’ve got the top end coming in offering lots of money, you’ll have private-equity-backed law firms offering real equity, and then you’ll have the allure of just not having any of the politics and just being independent.

“Mid-market firms will be fighting at all levels,” he said.

“How do they differentiate? What’s their clear strategy, kind of around technology and AI, but what’s their talent strategy? How are they going to differentiate and retain talent, particularly when those sort of younger generations are very mobile and entrepreneurial?”

VIEW ALL

Such questions were also posed by Lawyers Weekly at the start of this year. How such firms, whose numbers typically range from a few dozen to several hundred, look to differentiate with pricing and service offerings, use of new technologies, and worker experience, remains to be seen.

For Alison Laird (pictured), the director of innovation at the College of Law, the answer may come in the form of Australia’s legal market splitting into two viable operating models: scale-first firms and premium firms.

Under such a split, the mid-market would disappear.

Structural forces and consequences

In Laird’s view, there three forces are converging simultaneously.

Firstly, she said, AI is compressing the cost of producing routine legal work, “which is putting increased pressure on the margin proposition for firms that built their book on volume without the operational infrastructure to compete on cost”.

Secondly, clients and law departments are becoming more sophisticated and becoming “far more deliberate buyers, separating commodity work from genuinely complex matters and routing them accordingly”. They’re also, she added, leveraging AI to bring more work back in-house.

Thirdly, and as a result of the above, Laird outlined, expense growth is outpacing revenue growth across most of the market, “which means firms that lack a clear cost or premium story are being squeezed from both ends at the same time”.

“I think the reason it’s accelerating now rather than five years ago is that AI has moved from pilot to production, and now, in many cases, is embedded as ‘the way we do things around here’. Efficiency gains that were theoretical in 2023 are operational in 2026, and clients expect to see them reflected in price and service,” she said.

In short: Australia’s mid-market for legal services is getting squeezed from the large end of town, which is moving to protect complexity, and then also from below, with scale-first firms now having the technological capability to deliver volume work in a cheaper fashion, allowing them to muscle out competitors.

For firms that have traditionally sat in the middle of the pack, these converging forces lead to practical consequences.

It was put to Laird that this would involve losing work, margin, and talent, to which she responded that potentially all three are at play and will compound.

“Work is drifting towards firms or ALSPs with clearer value propositions. Margin is eroding because neither the volume nor the premium story is credible enough to justify rate integrity or annual rate rises. And talent (often the most underappreciated casualty) suffers as a result, with strong performers looking to work somewhere with a clear direction.

This leads, Laird said, to a cycle in which “without the talent to deliver the work, you won’t get the work to attract the talent”.

“If firms treat shrinking margins as a temporary pricing problem rather than a structural signal, then that is cause for concern,” she said.

Proactive v reactive choices

In the face of such factors, law firms will need to make an explicit strategic choice about the model they build towards.

According to Laird, “if you’re building towards a scale-first model, you should be investing in process infrastructure, legal technology, and pricing systems that let you scope and deliver repeatable work with confidence”.

“With that model, you accept lower margin per matter in exchange for higher throughput, and you restructure around those economics,” she said.

If firms wish to focus on building towards, or sustaining, a premium model, then they will have to double down on genuine depth in defined practice areas, she suggested.

“This means protecting your rate integrity (and expertise ‘value’), and get far more selective about your client base. It’s time to get rid of the long ‘tail’ and focus on the ‘20’ of the 80/20 rule,” Laird said.

What will ultimately then change, “immediately and concretely”, Laird said, is which clients a firm pursues, the work a firm aggressively prices for, and the work it stops doing entirely.

“I haven’t yet come across a firm that relishes saying ‘no’ to an existing revenue stream. But continuing to service work that doesn’t fit either model will only delay the reckoning I think is coming, and potentially weakens the position you’re trying to build,” she said.

This said, it is entirely possible, Laird mused, that the market will make such decisions for firms, rather than the other way around.

“One of the clearest signals is when clients stop inviting you to pitch for particular matter types without ever formally telling you why. The work just routes elsewhere,” she said.

“By the time that pattern is visible in revenue data, the market has already formed a view of where you sit. Think about how many clients now have ALSPs on their panels.”

Firms that are genuinely pivoting proactively, she said, tend to have leaders who’ve named the strategic question explicitly in the partnership.

They’ve not, she said, dressed it up as a transformation, but have called it what it is: “a choice about what kind of firm we’re going to be”.

That kind of candour is rare, she said.

“More common is a quiet drift towards whichever operating model the firm’s existing client mix and capability base already imply – which is still a decision, just one that gets made by inertia rather than intention,” Laird said.

“I think there is a limited window here for firms to have some tough conversations and make that decision for themselves, before the market does.”

Broader market observations

When asked what such bifurcation tells us about the broader professional services marketplace, and whether such a disappearance of the middle market will also happen in areas like consulting and accounting, Laird said she sees the same structural forces present across many professional services, with parallels close enough for legal – “traditionally a bit of a laggard” – to learn from.

The accounting profession, she said, is a step ahead, with the big four firms having pivoted away from the small- to mid-size audit market, while building out their more profitable advisory capabilities at the premium end, with technology-enabled compliance platforms at the volume end.

“Nobody called it bifurcation at the time. It just happened. I think law is heading to the same place, just faster, and with perhaps less excuse for being surprised by it!” Laird said.

What’s different in the legal profession, Laird observed, is the pace of compression and the cultural resistance to acknowledging it.

“Generally, lawyers are trained to see every matter as unique – and some elements are – but significant portions of legal work are ‘systematisable’,” she said.

“That belief in uniqueness has already sustained the middle longer than market logic ever warranted. And now AI is exposing it.”