The Thomson Reuters 2023 Australia: State of the 2023 Legal Market Report has been released, and the results are intriguing.
It shows that poor performance in the 2023 financial year’s first half, which seemed to confirm even the gloomiest predictions of recession, was countered by a strong second half and increasing optimism for FY 2024.
Over the past 12 months, I’ve witnessed many firms bracing for economic downturn by rethinking all of their spending habits, with many ultimately tightening their belts and implementing significant operational changes.
Now that the year has ended so positively for many, it remains to be seen if these spending cuts and other austerity measures will continue into 2024 while the economic outlook remains uncertain, or be reversed if law firms’ financial performance continues to rally.
Here’s my list of the top 10 most common measures that I saw law firms introduce throughout FY 2023:
1. Limit discretionary expenses
The first expense to be cut has been travel. While face-to-face meetings among teams or with clients are always preferred in an ideal world, a simple Teams meeting is the free alternative.
Extravagant client lunches and internal team events are in the same boat.
2. Refrain from paying discretionary bonuses
Many firms have discretionary and non-discretionary components to their bonus schemes. The discretionary components typically have loose or completely ill-defined criteria, and firms are under no obligation to pay them.
For that reason, they’re the next to go in hard times.
3. Implement more sophisticated workforce planning
This means taking a more deliberate approach to resourcing and team structures. I’ve seen firms reallocate files to spread the load more evenly, or even retrain and reallocate lawyers from quieter areas into busier areas.
4. Increase billable hour targets
This is always a particularly tough pill for lawyers to swallow, but increasing targets will always be the simplest way to increase a law firm’s top line.
Firms that have increased targets have been met with groans, but no serious backlash (yet).
5. Make it harder to hire
This is a measure most severely impacting on partners (and recruiters)!
Management at several larger firms are requiring partners to present more robust business cases to have headcount approved than in past years, causing a decline in the proactive, opportunistic approach to hiring that has defined recent times.
6. Implement hiring freezes or delay replacing departing lawyers
Ultimately, the effect of this is the same as increasing targets. Firms who manage to spread the same amount of work among less lawyers are squeezing more profit out of each lawyer.
Where I’ve seen this already begin to backfire is where it triggers a reinforcing feedback loop of burnout leading to resignations, and resignations leading to more burnout among the overworked who remain.
7. Cancel partnership pathways
Believe it or not, I’ve seen this too. Firms have held meetings with senior staff to let them know that (almost) all partner promotions are now on hold.
Special counsels with their own transportable practices can’t be held back easily, but those servicing their firm’s institutional clients – and who are up next in the queue for partnership opportunities – can be, and are.
Restricting the sharing of equity will increase a firm’s profitability per partner.
8. Restrict or freeze pay increases
This is a highly risky strategy that invariably leads to mass employee dissatisfaction. Some firms have still made the tough decision to freeze salaries or introduce token, lock-step increases across entire cohorts.
The consequences of those decisions will be borne out over the next few months.
9. Non-fee-earner redundancies
Administrative support, HR, and finance professionals have all sadly been on the chopping block this year. While this might be relatively commonplace in the broader corporate world, it’s a rare and jarring occurrence in law firms.
10. Fee-earner redundancies
The message that fee-earner redundancies sends to the market is probably worse than the problems that necessitate them. Nonetheless, at least 2 firms have made this tough decision in the past few months at both partner and sub-partner level.
While fee-earner redundancies are rarely made precautionarily, and other, more specific issues are generally at play, this measure still tops my list of measure taken by law firms during the pessimism and uncertainty of FY 2023.