While this year’s survey sees continuing positivity, confidence and growth in the legal sector over the last 12 months, the clouds of Brexit and domestic and international political uncertainty overhang Ireland and have had a significant impact on sector confidence looking forward.
Current economic positivity, in the legal sector is overshadowed by Brexit and the stability/ instability of the recently elected and new style Irish government. Concerns were also fuelled by potential outcomes in the US presidential elections and the elections in France and Germany due to take place in 2017. These issues have affected business confidence which is reflected in a noticeable decline in confidence reflected in this year’s survey. Only 55% of law firms (74% in 2015) and 54% of the top 20 firms (100% in 2015) believe the business outlook for the legal sector in Ireland improved in the last 12 months with 52% of firms and only 38% of the top 20 firms surveyed expecting an improved outlook in 2017.
Brexit has created a period of uncertainty that will result in a slowdown in investment and growth. All of the top 20 firms (59% of all firms) surveyed have suggested that Brexit will have a significant impact on the legal sector over the next five years.
In the shorter term there is a glass half full/glass half empty feel with 36% of the firms surveyed (31% of the top 20 firms) believing that Brexit will have a positive impact on the legal sector and 44% (62% of the top 20 firms) believing it will have a negative impact.
Most firms identified the economy and uncertainty as areas that concern them most. The majority of firms do not expect significant negative impact on their existing client base or levels of business in the short term. One in two, however, are concerned about levels of new business in the longer term.
Most firms (87%) expect more UK law firms to open offices in Dublin through a strategy of merger or acquisition rather than greenfield starts.
This year’s survey shows continued improvement in trading conditions and many firms enjoying increased revenues and profits again in 2016.
Maintaining profitability continues to be one of the main challenges for the sector with increasing fee pressures and continuing pay and operating cost increases. Increases in operating costs were reported primarily in the larger firms (46%), in Dublin firms (38%) and less so in firms outside Dublin (19%). Salary pressures, additional staff numbers and property costs are the primary drivers of these increases. Marketing and IT spend have increased and are running each at c. 5% of turnover for most firms.
These numbers help to explain why almost two in three firms stated that the outlook for their firm improved in 2016 and were confident about the outlook for their firm in 2017.
Maintaining profitability, pressure on fees and managing cashflows remain the key issues for firms over the next 12 months. Managing cash flows is expected to continue to present issues for many firms (51%) in the next 12 months as debtors, and work in progress, increase as a result of higher revenues.
Maintaining profitability is seen by most firms (54%) as the biggest challenge facing them over the next few years as a result of increased competition, fee pressures and increasing salary and operating costs. Firms report continuing pressure on fees in the last year. While overall the outlook was positive, the economy was identified by almost half of respondents as a key area of concern over the next 12 months.
Most firms, 74% (77% of top 20 firms) have made changes to business processes to improve their efficiency. Many firms have invested in technology to improve their processes and reduce their operating costs.
Firms are continuing to invest to grow revenues and market share. A more strategic approach to business development and brand differentiation is now required to make progress in a very competitive marketplace. As a result 74% of firms have continued to increase sales and marketing efforts (92% of the top 20 firms) in the last 12 months. Many have targeted new markets (53% overall and 92% of the top 20 firms) or introduced new services (36% overall and 69% of the top 20 firms) in the last 12 months.
While many firms have reduced or agreed to more fixed fees for certain work (52%) it is noteworthy that with growth in the economy and increases in salary and operating costs in firms that over half of the firms surveyed (52%) have increased their fees in 2016.
The opportunities most identified by firms over the next two to three years were: focus on specialist sectors 55%, investment in technology 54%, expansion in Ireland 47%, and investing in business development and marketing 47%. Top 20 firms identified lateral hires (61%) as one of their preferred growth strategies.
Most of the top 20 firms (92%) surveyed have increased staff numbers this year as did almost half of all firms surveyed (48%). Similar numbers of firms expect their staff numbers to increase in 2017. In contrast to the overall picture only 28% of firms outside Dublin increased staff numbers.
The increase in staffing levels means competition for talent continues to be a major challenge for firms. The recruitment and retention of staff is identified again in our survey this year as increasingly presenting difficulties for the sector. It remains a key issue, according to 35% of all firms surveyed and for 69% of the top 20 firms over the next 12 months. The sector has also seen a continuing improvement in employment opportunities for trainee solicitors and newly qualified solicitors. More firms reported having vacancies this year (40%) than in 2015 (33%).
Finding and retaining the right people is seen as a key challenge by firms. This is recognised in the increasing importance of both financial and non-financial rewards in attracting talented people. Changing reward and remuneration models is seen by almost half of the firms surveyed (47%) as a key factor impacting the profession in the next five years. This means identifying the rewards and retention mechanisms that employee’s value most. The most important reward mechanism firms identified in attracting and retaining talent is enabling more flexible working arrangements with 45% (77% of the top 20 firms) looking at increasing the use of this strategy over the next few years.
More than one in three firms (35%) reported pay increases of 3%+ in the last 12 months. Many smaller firms (39%) made no pay increases in the last 12 months (36% in 2015). For firms outside Dublin, 69% made no pay increases and only 19% increased pay by more than 3%. For top 20 firms 46% reported increases in excess of 5% and 84% reported increases in excess of 3%.
A largely informal approach to succession planning is still the norm across the sector. Most firms (82%) have informal plans for identifying future partners and managing partners (92%). This is not the case in the larger top 20 firms where most have formal processes in place for entry to partner level (69%) but, surprisingly, only 23% of these firms have a formal process for appointing managing partners.
When it comes to retirement planning most firms (60%) leave it to the partners themselves to get advice on retirement and pension planning (85% in top 20 firms). Firms therefore run the risk that partners do nothing or fail to plan early or adequately for retirement. As people are living longer, more want to work, or have to work because of inadequate pension pots, beyond 65. This can potentially leave firms with an ageing partner group and client base. This in turn can have implications on the ability of firms to offer the next generation the career progression they need and are looking for.
IT spend has increased again this year and is now running at c 5.6% of turnover including IT staffing costs in many firms. Technology will continue to be critical to success in the sector with 54% identifying this as the most significant opportunity for their firms in the medium term. For many firms investing in technology is seen as the key to gaining a competitive edge by streamlining operations and enhancing client service.
There has been a significant increase in cyber-attacks reported in this year’s survey with 29% of all respondent firms reporting such attacks significantly up from 20% in 2015. There has also been an increase in reported attacks for top 20 firms where 38% have reported that they were subject to cyber-attacks in the last 12 months.
Our survey findings again highlight the focus by Irish law firms on seeking to acquire individual teams or individual lateral hires to expand or strengthen their services offering to clients.
A similar number of firms compared to last year’s survey (40%), have been approached over the last 2 years for merger discussions (69% of top 20 firms). It is anticipated that more firms will be approached as UK law firms seek to open offices in Dublin.
Almost two in three firms have stated (69% of the top 20 firms) that they intend to convert to an LLP and most of them intend to do so within the next two years (44% of top 20 firms).