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Vast majority of SME firms forecast revenue increase despite declining economy

A new report has revealed that despite a potential recession being one of the main challenges for smaller firms, the majority remain optimistic about their revenue growth moving forward.

user iconLauren Croft 29 June 2023 SME Law
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Only one in eight SME firms across Australia forecast a decline in revenue in 2023, according to the New Law CLE Australian Legal Industry Report 2023, released this week.

Just under a third of respondents said they expect to see revenue increase by more than 10 per cent, with the same amount forecasting growth of up to 10 per cent, as well as a quarter expecting revenue to remain the same, and only 12 per cent expecting a decline.

Lack of time was declared the current greatest challenge as a smaller legal practice in Australia (60 per cent), followed by increased expectations from clients (38 per cent), lack of staff (37 per cent), increased compliance (37 per cent), and lack of resources (34 per cent).


In terms of investment priorities for smaller firms, 50 per cent said that marketing is top of their list, followed by work/life balance at 49 per cent, self-training and development (39 per cent), staff training and development (36 per cent), and technology upgrades (31 per cent). Lower down the list of priorities are practice management systems (10 per cent) and mobility (6 per cent).

Additionally, 87 per cent of respondents said that work/life balance is an important part of their firm’s culture — but 11 per cent noted that this is only “in theory”, and in practice, employees are still expected to prioritise work.

These priorities mean that more firms are starting to see themselves as businesses rather than law firms, according to Smarter Drafter chief executive and managing director Steve Hantos.

“By a slim margin, marketing is the number one priority for small and medium-sized law firms this year. This suggests now more than ever, law firms are starting to see themselves more like traditional businesses who need to build their brand, generate leads and build relationships with customers,” he said.

“This is also consistent with the commodification of many legal services where often the firm that wins the work is the one with the best marketing. It’s also great to see that firms are committed to investing in better work/life balance for staff as an important part of their culture rather than shifting back to how they operated pre-pandemic.”

Billable hour is declining

According to the report, 54 per cent of small firms agreed that the billable hour is not a sustainable mechanism for continuous improvement, while only 17 per cent disagreed with that statement, and 29 per cent remained neutral.

Almost a quarter of respondents made more than 90 per cent of their revenue from fix-fee matters, up from 18 per cent in 2022, with 53 per cent believing fixed pricing increases client retention and loyalty and 46 per cent stating that it had no tangible impact.

Only 7 per cent of firms offer a subscription service.

Pricing trends

Across all legal services, pricing has risen by 6 per cent on average from 2022. The sharpest increases have been seen in corporate law, with the cost of IP license agreements, loan agreements, company constitutions, and business sale agreements increasing up to 15 per cent. These services for corporate customers and transactions also yielded the highest hourly rates for lawyers and, coupled with a decrease in the average time taken to deliver the services, made it one of the most profitable areas of law in 2023.

Conveyancing remains one of the most competitive and least profitable legal services, according to the report, which noted that as more conveyancing is being done online, the need for inputs from official institutions and monopoly providers has made progress slow in terms of reducing costs and drafting time for documents.

In contrast, employment law services costs jumped by 15 per cent in 2023. Although a lot of documents are now bundled into corporate HR software, changes to the law and regulatory body rulings are making this area more specialised, allowing employment lawyers to charge higher rates.

According to the report, the type of legal services provided is not the key criterion when firms come to setting pricing. Ninety-three per cent of firms set the cost based on the time and effort required, followed by the complexity of the matter (82 per cent), the level of experience (72 per cent) and the practice area type (62 per cent).

Aside from pricing, referrals from satisfied clients are the outstanding method that firms use to compete with other firms (91 per cent), followed by focusing on a particular niche in the market (49 per cent), increased marketing and brand-building (39 per cent) and modern service delivery such as the use of online tools (35 per cent).

There was also an increase in the hourly rates of paralegals (+$9) and junior lawyers (+$4), particularly in smaller firms where they tend to be more involved with the client. There was a notable increase in fees charged by senior lawyers (+$23), while partners have increased their hourly rate by $40.

Tech to continue to make an impact

Forty-three per cent of firms said that legal tech is making their work more enjoyable and profitable, and 21 per cent were excited about the future revolution in legal services. Sixty-four per cent of respondents do not believe artificial intelligence (AI) poses a threat to the legal services sector. Forty-three per cent of firms believe AI-enabled tools will make lawyers more valuable, while 30 per cent believe it will render them less valuable, and 27 per cent think it will make no difference.

When asked about how they would spend their time if automation was used to find and correct drafting errors, 57 per cent of firms noted business development and client acquisitions and doing something outside of work, such as time with family or playing sports, with 51 per cent stating that they would improve internal processes at the firm, and 34 per cent would look into further education.

“As artificial intelligence, machine learning and automation become more integrated into the legal industry, it raises valid questions about their impact on traditional billing structures and roles and even whether certain legal professions will become obsolete,” Mr Hantos added.

“With the New Law CLE Australian Legal Industry Report, we commit to keeping law firms abreast of pricing and technological developments across their industry and practice areas to ensure they are equipped to navigate this ever-changing landscape.”

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