The New Zealand legal market is experiencing a welcome return to stability after a period of significant fluctuations, but challenges remain on the horizon
The New Zealand legal market exhibited resilience and adaptability in 2024, with domestic law firms building on early momentum to achieve a strong performance. Despite the challenges of the past few years, law firms in New Zealand seem to have stabilized their financial performance and are positioned for even greater potential growth. However, challenges loom on the horizon that may yet dissuade their prospects and derail their recovery.
To examine this further, the Thomson Reuters Institute has just published the 2025 Report on the State of the New Zealand Legal Market, detailing much of what is happening in the legal ecosystem of that region.
A welcome return to stability
The past five years have been marked by significant financial fluctuations for New Zealand law firms. From 2020 to 2021, firms saw significant annual growth in profits, driven by a boom in transactional demand. However, this period of outperformance ended sharply, leading to two consecutive years of reduced profits from 2022 to 2023.
The recent historical context shows that in 2020 and 2021, New Zealand saw average quarterly demand growth of 7.1% year-over-year. However, demand fell nearly as quickly as it rose, averaging a 0.8% contraction per quarter in the following two years. These fluctuations were largely influenced by transactional practices, which peaked at 23.6% growth in Q2 2021 and reached a low point of a 7.5% contraction in Q4 2022. Unlike other regions, New Zealand did not see corresponding growth in counter-cyclical practices from 2022 through 2023 to make up for the transactional pull-back.
In 2024, law firms faced the challenge of reversing these declines and returning to peak performance levels. Fortunately, the momentum began to shift as key transactional practice areas finally saw improved results. Yet despite a weak first quarter, performance improved dramatically over the second and third quarters, resulting in an improved profit position by the end of 2024.
The return to normality
Although fortunes for the broader New Zealand economy and law firms began to turn in 2024, the recovery was inconsistent. The legal market initially faced a broad downturn in Q1, but transactional practices spurred a recovery in the following quarters. Despite cooling in Q4 due to a decline in counter-cyclical demand, the full fiscal year demand performance in 2024 was essentially flat compared to 2023. Further, law firms were able to increase their worked rates substantially; however, this was simply because they were using higher prices to make up for weaker demand. This pricing power push, coupled with more normal demand, resulted in moderate revenue growth for 2024.
With expense growth under tighter control, law firms in the region enjoyed an average 3.4% increase in profits in 2024 compared to the previous year. This comes as a relief that has largely reversed the effects of the past two challenging years, during which firms faced a harsher demand and expenses environment that led to a combined 2.6% decline in overall profits from 2021 to 2023.
During this difficult period, margin compression became a larger concern. Profit margins fell to 43.0% in 2023 from 48.5% in 2021, primarily due to the simultaneous slowdown in revenue growth and the uptick in indirect expense growth. Despite these challenges, profit margins among New Zealand law firms have consistently been high compared to other regions. Even with 2023’s 43.0% margin, the average profit margin for the region’s firms surpassed the averages seen among law firms in the United States, Australia, and the United Kingdom.
The road ahead into 2025
In 2024, New Zealand law firms navigated a landscape of recovery and growth, with stabilized demand and expenses leading to profit growth that marked a shift from previous challenges. However, the reliance on transactional demand poses a risk of volatility in an already unstable international situation, underscoring the need for strategic diversification.
More worrisome, elevated compensation levels for associates continue to pressure financial structures, requiring careful management for sustainability. By leveraging lessons learned and focusing on strategic growth and efficiency, the New Zealand legal market can thrive amid uncertainty. And though vigilance and flexibility, law firms there can capitalize on opportunities and weather future challenges.
For a comprehensive outlook on the New Zealand legal market and to prepare for the future, you can download the full report here
