The following headline appeared on the thelawyer.com last week:
If you take the time to read the article, you will see that Hogan Lovells posted a drop of 1.9 per cent in firm-wide revenue for 2012, and that average profit per equity partner (PPEP) also fell by 5.8 per cent for the same period.
Many in the industry would say that given the tight competition law firms have faced over the past year, these results were not too bad. But not Hogan Lovells management team. They see the drop as “largely” being due to exchange rate fluctuations.
More specifically, Co-CEO David Harris is quoted as saying:
“It’s the exchange rate that accounts for the dollar reduction,” said Harris, pointing out that several years ago turnover at legacy Lovells had benefited from exchange rate fluctuations.
“We have three operating currencies which means to an extent we’re dependant on the currency markets and they can work against you as well as in your favour,” said Harris. “But last year the impact wasn’t huge.”
So, why does this matter to Australian law firms?
Well, if you’re one of the new Australian firms that has decided to form part of a global law firm organisation, then the experience of Hogan Lovells should put you on notice that foreign exchange rate fluctuations need to be a core part of your strategy going forward.
On this note, those clever people at Goldman Sachs – whom you would hope do know a thing or two about exchange rate fluctuations – are quoted in a post on the BRW website today to the effect that:
“The Goldman Sachs house view is that the Australian dollar is expected to decline some 20¢ relative to the US currency by the end of 2016.”
The importance of this becomes clear when you realise that Australian law offices who report back to an overseas head office could, in effect, have a numerical “loss” or “fall in revenue” of 10 to 20 per cent or more, without there being any real decrease in their domestic revenue/profit.
Worse, in order to keep their fellow partners happy in London, New York or Chicago, Australian-based partners will need to drastically increase their local revenue and profit without having the pleasure of their being credited with this on an international level! And keep in mind that all of this is taking place at a time when the market is becoming more competitive on a daily basis.
All I can say to that is – “best of luck”. Alternatively, maybe now is the time to call your bankers and to start getting involved in foreign exchange currency swap arrangements.
And who said managing a law firm was easy?