Nonetheless, talent retention continues to be a thorn in the side
Legal firms appear poised to continue a recent pattern of considerable growth, according to the 2024 Legal Benchmarking Report released by Macquarie Business Banking.
A survey of 185 small, mid-tier and large firms revealed that 43% reported an annual revenue of more $5m; 35% reported an annual revenue of $5m-$20m; and 22% logged an annual revenue exceeding $20m.
The report highlighted the strong performance of the legal sector over the past five years, characterised by increased revenue and profitability. This success is largely attributed to heightened client demand.
In the 2023 financial year, firms of all sizes recorded strong fee incomes, and nearly all of the firms surveyed were profitable. A whopping 80% of firms reported net profit margins above 10%, and one in three firms recorded net profit margins of over 30%.
“As the landscape continues to evolve, we see significant opportunities emerging for firms to capitalise upon their position as trusted advisers, with work expected to expand in key practice areas”, said Matthew Bolle, national head of legal at Macquarie Business Banking. “Clients are increasingly seeking advice in areas such as technology and innovation, restructuring and insolvency, mergers and acquisitions, and environmental, social and corporate governance”.
According to Bolle, larger firms with annual revenues of more than $20m show a propensity for utilising debt to support growth initiatives, with nearly three in four maintaining a debt limit more than 0.5 times their profit. This approach allows these firms to finance growth initiatives, implement succession plans and boost scalability.
“By leveraging their balance sheet, firms are able to invest in technology, build capacity and commit to new practice areas, strategically utilising business assets to drive capital investment and scale, sidestepping the challenges associated with incremental growth, such as resourcing issues, technology implementation and inconsistent client experience”, he said. “Firms navigating the balance between calculated risks and strategic investments are well-positioned to not only weather uncertainties, but to thrive. Key considerations to embrace change and seize opportunities include a clearly defined strategy with decisive action, resourced effectively”.
Moreover, tech has become a priority for many firms, particularly the use of AI in research, due diligence and business development.
“Larger firms reported a significantly higher integration of technology tools in their everyday operations, resulting in almost 80% higher revenues per full-time equivalent team member compared to smaller firms”, Bolle said.
Nonetheless, talent retention remains an issue for firms, with 85% of respondents considering it a key business challenge.
"The findings indicate that high performing firms achieve greater revenue and profitability while maintaining a more efficient salary spend, allocating a third less on salaries compared to other firms and employing two-thirds fewer staff", Bolle said. “This efficiency is attributed to a higher ratio of fee-earning staff, strategically positioning support roles equipped with advanced technology and resources. Improving the efficiency of support staff allows firms to assist a greater number of fee earners, which can drive higher levels of profitability in turn”.
