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Industry forecast: sunshine

Industry forecast: sunshine

ACCORDING TO the latest IBISWorld industry report, the legal services industry is in the growth stage of the business lifecycle. Industry revenue is expected to increase by 5.5 per cent in…

ACCORDING TO the latest IBISWorld industry report, the legal services industry is in the growth stage of the business lifecycle. Industry revenue is expected to increase by 5.5 per cent in 2008—09, to $20.35 billion.

Over the five-year period ending 2007—08, it is predicted that legal industry gross product will increase by an average annualised real rate of 3.9 per cent per annum. Compare this with the growth of the overall Australian economy of 3.2 per cent, and the figures look even more impressive. Factors taken into account to assess the lifecycle phase are: performance of industry value added, enterprise and establishment numbers, products and services, technological change and wider market changes.

Several distinct trends are flagged in the October 2007 IBISWorld report. Merger activity is expected to intensify, and IBISWorld predicts that mergers between top- and second-tier firms are highly likely. Further international alliances, such as the recent partnership between Phillips Fox and DLA Piper, are also a strong possibility.

The listing of law firms on stock exchanges will precipitate substantial changes in revenue sources and market structure. Case in point, when Australia’s first listed law firm Slater & Gordon listed on the Australian Stock Exchange in late-May, share value increased by 60 per cent in two days. The report anticipates that the firm will acquire a number of smaller firms over the next five years. Other firms are giving serious consideration to the incorporation option, including market leader Freehills. However, Legal Services Commissioner Steve Mark says we should not get carried away by the predictions (see box).

The upswing in merger activity will put the squeeze on smaller firms, with some being forced out of the market. As a result the total number of firms is expected to decline from 2010—12. Overall however, legal industry volatility will be low at 2.2 per cent (a value below 3 per cent indicates low volatility).

Of course, the overall growth of the legal industry is tied to wider economic conditions. In the medium-term, price competition is tipped to intensify, despite the increasing costs associated with staff retention. Strategies may include reducing fees or imposing fee limits, and reducing the headcount at larger firms to counterbalance any excess capacity.

Competition between top-tier and mid-tier firms is set to intensify. The deregulation of industry will open up interstate competition, with an increase in the number of multi-state and national operators. Reform is on the agenda of both the state and federal government who are seeking to increase competition and reduce legal costs (and thus law firm profits).

There are a few clouds gathering for the property sector, as the economic climate cools off in the wake of interest rates rises and the property market dip. As the economy slows down, all law firms will become more focused on client retention.

The key growth areas of practice are identified as: family law (courtesy of the increased divorce rate), commercial law (due to continue M&A and IPO activity) and personal and business insolvency (through high levels of household debt). Product liability suits, class actions and ongoing tinkering with employment law will create more work for specialist legal firms.

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