Firms risk halving profits within 10 years

The Australian legal profession has reached a crucial crossroads, according to a new report - but where do New Zealand firms stand?

The head of a major Australian consultancy group has issued a dire warning to the professions, saying law firms in particular are at risk when it comes to “life cycle maturity”.

Beaton Capital partner, Warren Riddell, spoke with NZ Lawyer sister publication, Australasian Lawyer, on the back of his company’s newly-released paper, Life Cycle Maturity and the Professions, which looks at the future of law firms, accountancy firms and engineering consultancies.

Of those analysed, the future for law is the grimmest, he says.

“Law was the last profession where it was a sellers’ market – now it is very much a buyers’ market, and the bulk of them didn’t see it happening,” Riddell says. “[All law firms] are affected, there’s no doubt about it, but the ones that have got specialisations are probably more protected. The more generalist you become, the harder it is to differentiate.”

Major problem areas include heavy price discounting to stay competitive even though base costs remain the same and inefficiency.

“Unless they restructure their cost base they will halve their profits within the next 10 years. It’s massive,” Riddell says.

And even more worrying is that accounting firms, who have more recently been trying to take a slice of the legal pie, have already been through this part of the cycle and have restructured accordingly.

“They’re coming back in with very clever market strategies as opposed to being generalist. They will be a formidable competition going forward in the next five years in selected markets,” he says.

However, when asked whether the outlook for New Zealand legal professionals was quite so grim, Riddell did have some positive news.

“Not really. The reason is that the market is quite small….the NZ market is experiencing [now] what the Australian market did before. It’s a tough market, no doubt about it, but I don’t think they’re going to see the significant change that the Australian market has seen.”

One warning Riddell did issue to New Zealand firms was the possibility of foreign mergers and acquisitions, much like the Australian legal sector has experienced over the past few years.

“I wouldn’t be surprised if a couple of the big international law firms ended up buying out an office in New Zealand – they’re chasing capital – but whether that would make a difference or not I don’t know.”

He says can see the potential for international law firms to come in and “rebadging” local firms – and, he adds, pricing in New Zealand is “quite low” relative to Australia.
Riddell says Australia is about five years behind the UK in the maturity cycle and word on the street is that as much as one third of law firms are in trouble.

This doesn’t necessarily mean that Australia is heading in exactly the same direction, although it’s almost definitely in for far more mergers, acquisitions and firms dying.
 
“I don’t think you can predict it because there’s more resilience in the market than people realise, but we are seeing the start of a shake up,” he says.

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