Profitability at Australian law firms hit a record in the year to June as corporations sought help navigating the turbulence of COVID, a new report says.

Average profits as a percentage of revenue rose to 37% in the year, the Thomson Reuters Institute says, boosted by a 2% rise in demand for legal services, a 1.6% lift in worked rates and a 3.5% fall in expenses, helped by staff working from home.

“Firms are adapting their services to tap into nascent client needs in areas such as regulation and mergers & acquisitions where demand has grown 14% and 9% respectively,” Thomson Reuters MD of Asia & Emerging Markets Jackie Rhodes said.

Banking & finance and general corporate work also drove demand. Firms added 15 partners in insurance over the 12-month period.

Insurance was just behind the three most “competitive hotspots” for partner talent: M&A, Property & Real Estate, and Employment & Workplace Relations - the top hotspot with 26 new partners added on demand for advice on work-from-home policies and COVID-safe compliance with government guidelines.

The report says Australian firms are a "beacon of innovation," fuelled by “technology, necessity and crisis”. Now, law firms must make "big strategic decisions" on how to deploy technology to ensure the best opportunity for future growth, it says.

"Australian law firms have proven themselves extremely resilient in managing through the tremendous ups and downs encountered over the past year," Ms Rhodes said.

The shift to remote working in particular had made law firms more efficient and given legal staff the flexibility and balance “they had craved".

Australian firms, on average, outperformed their US counterparts in terms of demand growth and growth in lawyers, and the report said a trend toward team acquisitions continued to shape the “war for talent” in the Australian legal industry.

Some 50 partners switched firms as part of a team of lawyers in fiscal 2021.

While the conclusion of the Hayne Royal Commission will signal the end of legal advisory opportunities for which law firms had “so vigorously competed” in recent years, a “growing penchant” for similar inquiries may drive new opportunities, the report says.