Head of Professional Practices, Head of Business Interests London +44 (0)20 7131 4369
Embracing change in a new era for law firms
109 managing partners and other senior management figures from UK-based law firms took part in our latest annual survey, carried out in May and June 2016. The survey shows that confidence in the profession remains high, but uncertainty over Brexit will compound other key challenges.
Business confidence in the legal sector prior to Brexit was high, with 93% of senior figures stating that they were confident about the business outlook for their firm over the next year. However, according to our survey — carried out before the referendum — leaving the European Union was not the result respondents anticipated or welcomed, with just over three-quarters believing it would be negative for their business.
Business confidence in the sector is likely to take a knock, at the very least, given the protracted period of uncertainty now anticipated in the UK economy and internationally and it will be down to firms to remain nimble and decisive in response to changing circumstances.
Our survey suggests a trend towards polarisation in the legal marketplace between the cost-competitiveness and specialist expertise of niche firms on the one hand, and the one-stop shop approach of larger firms on the other. Firms taking the full-service approach will need to work hard on their marketing, positioning and ability to cross-sell.
Technology will continue to be critical to success in the sector, with 13% of respondents identifying this as the most significant opportunity for their firms in the medium term. For many, investment in technology is seen as the key to gaining a competitive edge by streamlining operations and enhancing client service.
More than a fifth of firms are considering changing their structure in the next two to three years, according to our survey, suggesting a possible move away from the dominant limited liability partnership model. While incorporation as a company is the most likely route, among those firms open to a shift a quarter would consider changing to shared ownership. While shared ownership is largely unproven in the profession, it would undoubtedly represent a significant shift in mindset.
Our research shows that firms have huge potential to improve lock-up and this is widely recognised by the senior figures in our survey — 70% believe that improving lock-up is the single most important potential source of funding for their firm. In reality, however, firms rarely make progress in this area, despite their best intentions. Partly as a consequence of this, many firms say they are likely to require external funding, which the more risk averse have long resisted, and appear to be more open to investment from private equity and other financial investors.
Expansion of their office networks is not a key priority among most firms, with over half of respondents, 55%, saying they have no intention to expand geographically in the next two to three years. Of the firms looking to expand, the focus is currently within the UK, rather than internationally, although it remains to be seen whether firms will reconsider their international strategies in light of Brexit.
Finding and retaining the right people is, of course, essential for any successful law firm and this factor is seen as the number one challenge for their firm by 56% of respondents. Firms acknowledge the importance of both financial and non-financial rewards in attracting talented people and appear to be responding to the aspirations of the millennial generation through a greater focus on training, career development, mentoring and appraisals.
Presenting a clear and compelling proposition to prospective employees, and offering appropriate career opportunities and remuneration in a competitive job market, will clearly be important for firms in the war for talent. This means identifying the reward and retention mechanisms that employees value most. However, over a third of firms say they are not effective at identifying people at risk of leaving and a quarter admit that they don’t provide a clear route to partnership.
The most important factor in attracting new recruits, according to our survey, is more flexible working, which 81% of respondents believe will increase in importance in the next few years at the expense of the more rigid working arrangements traditionally found in the sector.
Nearly a third of firms now employ a chief executive officer, perhaps indicating that they recognise the value of having more commercial experience on their management teams and are moving towards a more ‘corporate’ leadership style.
Members of the management team tend to be selected by the existing management team, according to 61% of firms, rather than by election. Although the selection process for the senior management team will largely be driven by the culture of a firm, the less democratic approach arguably gives the existing management team the best opportunity to select new members with complementary skills and personalities.
Most firms continue to have a fairly informal approach to succession planning at all levels. For example, the majority of firms surveyed, 93%, still do not have a programme in place to support partners in planning for their retirement. Given the major changes to pension rules introduced over the last few years, which two-thirds of firms surveyed believe will have an impact on partners’ retirements, firms could benefit from having more structured retirement programmes in place. In the absence of these, they may find more partners delaying retirement — with important implications for developing and rewarding the next generation.