Challenges, like reliance on transactional work and rising salaries, threaten future growth
New Zealand's legal market rebounded in 2024, with law firms stabilising profits after years of volatility, but ongoing challenges—including reliance on transactional work and rising associate salaries—pose risks for future growth, according to a new report from the Thomson Reuters Institute.
The 2025 Report on the State of the New Zealand Legal Market showed that between 2020 and 2021, New Zealand law firms experienced significant profit growth fueled by a surge in transactional demand. However, this trend reversed sharply, leading to two consecutive years of declining profits in 2022 and 2023.
According to the report, average quarterly demand grew 7.1 per cent year-over-year in 2020 and 2021 but contracted by 0.8 per cent per quarter in the following two years. Transactional practices peaked at 23.6 per cent growth in Q2 2021 and saw a downturn, with a 7.5 per cent contraction recorded in Q4 2022. Unlike other regions, New Zealand did not experience a corresponding rise in counter-cyclical practices to offset the slowdown.
In 2024, the market showed signs of recovery. Despite a weak first quarter, transactional practices rebounded, driving stronger performance in the second and third quarters. By year-end, firms had reversed previous profit declines, supported by moderate revenue growth and controlled expense increases.
While the recovery in 2024 was uneven, overall demand remained stable compared to 2023. Firms also raised their work rates, using price adjustments to compensate for weaker demand. This approach, combined with cost control measures, resulted in an average 3.4 per cent profit increase for law firms.
Profit margins, which had declined from 48.5 per cent in 2021 to 43.0 per cent in 2023, remained a concern during the downturn. However, despite this reduction, New Zealand firms continued to outperform those in the United States, Australia, and the United Kingdom regarding profitability.
While 2024 marked a financial turnaround, the legal market faces ongoing risks in 2025. The industry relies heavily on transactional work, leaving firms vulnerable to economic shifts. The report warns that this reliance could introduce renewed volatility without greater diversification.
Another pressing issue is the rise in associate compensation, which continues to strain firms financially. Managing these cost pressures will be crucial for long-term sustainability.
The report suggested that firms can capitalize on strategic growth opportunities by focusing on efficiency and diversifying their practice areas. While the market remains uncertain, law firms that adapt to changing conditions may be better positioned to navigate future challenges.
