A Legal Profession in Crisis

A Legal Profession in Crisis

As a young law student filled with the optimism of the mid-2000s, emerging into the post-GFC working world was a shock. The heady days of triple-figure clerkship intakes and guaranteed graduate spots, so promising when we began our degree, were replaced by deferred starting dates, cut-throat competition and hiring managers in thrall to short-term market sentiments.

Fast forward six years to 2015 and very little has changed. According to a new report  by Thomson Reuters and Melbourne University Law School (featuring data from 23 large law firms), the industry, once so self-assured about its independent and invaluable contribution to society and its place in it, now finds legal services increasingly being relegated to an in-house function. Large law firms, after a mild surge in 2010-2012, have seen demand shrink year on year for the past three years.

The shrinking demand has presented itself, except for a few exceptions, across a wide variety of legal services. Corporates have seen a shift towards in-house work at both the transactional end, where companies with a few judicious hires could eliminate the need for outsourcing, to litigious work, where up until now only the most vulnerable corporates would dare pay a lawyer full-time to handle what would be an uncertain and lumpy pipeline of disputes. The report notes that the structure of the profession has moved from 10% of all corporate lawyers practicing in-house to 35% in the past 10 years. The past three years has also seen a 10.8% reduction in law firm lawyer numbers for the “big 8 firms” in the market (Allens, Ashurst, Clayton Utz, Corrs Chambers Westgarth, Herbert Smith Freehills, King & Wood Mallesons, Minter Ellison and Norton Rose Fulbright) with associate positions (typically between 0-5 years PQE) dropping by almost 20% at those firms.

These changes have been blamed on a weakening economy, with the associated inference that once the good times roll again corporates will more readily pass the work to an increasingly crowded list of law firms with double-barrelled surnames.

This perspective only tells half of the story, and downplays the long-term implications of recent market shifts.

Pressures faced by young and old

The tidal wave of students emerging from the multitude of new law schools in Australia continues to flood the market. Victoria, cited by the report as an example of massive student oversupply, has had the number of law schools increase four-fold in the past 12 years. Universities, tired of producing graduates who require infrastructure and facilities to teach, have turned in droves to providing degrees that require little more than an internet subscription.

Law firms have also benefited from the influx. Graduates on their books are imbued with the sense the privilege of a job is all theirs, with such highly trained and intelligent graduates able to be quickly discarded for the hordes of young lawyers able to take their place. Most recently, some firms have charging the students themselves for work experience, given the highly competitive nature of the market.

While this shameful display has been questioned by the Law Society of South Australia, and even investigated by the Fair Work Ombudsman, the Thomson Reuters / Melbourne Law School report provides evidence of an emerging trend of entrenched exploitation in the wider profession. The report shows while firms have had to wear a two per cent drop in demand, they have also cut lawyer numbers by four per cent. Despite reductions in work and headcount, the Big 8 firms have enjoyed a four per cent increase in productivity over financial year 2015.

Such statistics shows that those remaining are required to work harder with reduced resources.

Clients are also increasingly refusing to pay to train staff below the senior associate level, putting the most precious of an associate’s KPI numbers, the billable hour, at risk. Barristers, given their lower overheads and cheaper charge out rates, are even being handed work typically reserved for summer clerks and paralegals.

So, the sophisticated and cost-conscious client wishes to pay less. But this is not the only lesson to be learnt from the past few years. The public profile of the profession is changing.

The avalanche of law graduates and the refusal to set limits on those entering the profession, the lack of deference shown to traditional law firm structures, the influx of “NewLaw” firms operating digitally and flexibly – all these factors have increased the level of segmentation within the profession and to some extent, confused and shocked the market.

Despite such a scenario, a sense of entitlement amongst some large law firm partners remains unchecked. It is still not unusual to see profit per partner at 10 to 12 times the salary of the average junior, or even 5 to 8 times the salary of someone doing the actual work.

While clients remain on a quest for value, large law firm heads are grappling with high overheads and a transition to a more ‘competitive’ partner remuneration model, which often leaves a trail of unhappy partners prepared to move firms in its wake.

When the sun does eventually rise again on a thriving legal market, its light will shine upon a very different landscape.

Matthew Hodgkinson is a consultant with Eaton Capital Partners. He has previously worked as a lawyer at Norton Rose Fulbright, Minter Ellison, K&L Gates, and Atanaskovic Hartnell