What an Hour of Your Time Earns
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It's been a good year to be running a law firm.
That's the headline from two reports released this year by the Thomson Reuters Institute: the 2026 Report on the State of the New Zealand Legal Market, published in March, and Australia State of the Legal Market 2026, published with Melbourne Law School in August.
In New Zealand, revenue grew 10.3%, profit grew 16.5%, and profit per equity partner rose 13.7%. Firms kept an average of 43.7% of revenue as profit. In Australia, the value of work done grew 10.2% and profit grew 11.3%, and the report describes FY2026 as "one of the strongest periods for the Australian legal market in more than a decade."
Both are worth reading. They also got me thinking about a question they aren't set up to answer: what a year like this looks like inside a firm with one or two partners, where the principal is involved in most matters and most decisions.
Firms with layers
The New Zealand report tracks utilisation for equity partners, non-equity partners, senior associates and associates. The Australian report is built from 27 firms, including some of the largest in the country, and sorts them into the Big 8, large firms and midsize firms. The smallest category it has is called midsize. That's a picture of firms with layers, where work flows down a structure and profit flows up to the partners.
Most of the firms I work with don't have layers. The principal is the layers. They are the lawyer, the supervisor, the business developer, the office manager and the owner, often in the same afternoon.
So when a sole principal reads that it was a strong year, there's no way to tell whether it was a strong year for them. The measures don't reach that far down.
Where the headline number stops being useful
The New Zealand report's 43.7% margin is a good example. In a big firm, that's what's left for the equity partners once everyone else is paid. In a firm with one principal, that line is simply what the principal takes home.
Here is an illustration.
Say, a sole principal runs a firm with a small team of lawyers and support staff. The firm bills $700,000 in a year, and once the team and the overheads are paid, the principal takes $210,000. That's 30% of fees going to the owner. Below the market average, but on paper a respectable year.
Then the hours. The principal works about 50 hours a week, for 46 weeks. That's roughly 2,300 hours. $210,000 across 2,300 hours is about $91 an hour.
Their charge-out rate is $450.
The margin looks respectable. The return on the principal's time is about a fifth of what they charge for it. Both are true at once, and only one of them shows up in a market report.
The number I keep coming back to
In a firm this size, the number that matters most is what an hour of the owner's time actually earns. Not the rate on the card, but the return on every hour they work, including the quoting, the supervising, the chasing and the admin that never gets billed.
Large firms don't need to measure this, because the partners' time is spread across a structure built to multiply it. In a small firm, the principal's time is the firm's main input, and very little multiplies it.
There's a line in both reports that I think gets overlooked. Part of the good year came from each lawyer billing more hours, up 1.4% per lawyer in New Zealand and 1.3% in Australia. In a large firm that's one lever among many. In a small firm it's usually the only lever the principal has, and most have already pulled it as far as it goes.
The Australian report makes a related point about the largest firms. The Big 8 grew their profit the most while adding almost no lawyers. The large firms added the most people and grew their work fastest, and still couldn't turn that into the biggest profit gains. What won was getting more out of each lawyer, not adding more of them. For a sole principal, the version of that is the return on the owner's hour.
What I notice in the firms where that number is low
I don't have figures on this yet, only patterns from the firms I've worked with. Three come up again and again.
Money comes in after the work rather than before it. So when cash gets tight, the principal's own drawings are what gives, quietly, month after month.
The unbillable load lands on one person. Every quote, every supervision question, every overdue invoice finds its way back to the principal's desk.
Fees get set matter by matter. Which usually means they get set on the day, under pressure, at whatever feels safe.
None of those show up as a line in a market report. All of them show up in the hourly number.
What I don't know yet
What I can't tell anyone is where their firm sits. Whether $91 an hour is typical for a firm like that, or low, or better than most. Nobody has asked firms this size these questions, so the answer doesn't exist.
So over October and November, I'm sitting down with principals of firms with one or two partners to find out. Twenty-five minutes, nothing to prepare, nothing recorded, and no firm named in anything I publish. Everyone who takes part gets the findings, plus a private summary of where their own firm sits.
If that's you, and you'd be open to it, email me at [email protected] and I'll send you the details. In person if you're in Auckland, on Zoom anywhere else.
More next Tuesday