Nearly two in three Irish law firms (87% of the Top 20 firms) are indicating they will change to LLPs once the regulations are finalised by the Legal Services Regulatory Authority (LSRA), demonstrating an appetite for the opportunities and advantages this will bring.
There is plenty to celebrate for Irish law firms: revenues continued to improve in most firms in 2019, with 43% showing revenue growth in excess of 10%. Profits also continued to improve in most firms, particularly at the top end. That said, there has been a discernible drop in confidence across all law firms. After many years, when legal firms expected the outlook to improve, most firms now expect a stable or deteriorating outlook.
The key issue is Brexit. The UK’s exit from the European Union is making its presence felt in the Irish legal market in a number of ways. First is the direct impact to cross-border business, but it is also exaggerating competitive pressure for staff as UK law firms set up shop in Ireland. In addition, it is generating increased merger and acquisition activity and prospective discussions. This adds to the well-documented market pressures faced by law firms: rising salaries, a technology arms race and increasing operating costs.
The legal sector continues its strong performance, with 65% of firms reporting an increase in revenues. Profitability is also strong with more than half of respondents reporting an increase in profits - and 67% of yop 20 firms - albeit with many reporting slower growth than in recent years.
However, the outlook of firms is notably less upbeat as Brexit and a decline in the global economy weighs on sentiment. In contrast to last year, relatively few now see Brexit as an opportunity and more see it as a notable risk.
Recruitment and retention of staff remain top priorities across the sector. After the economy and Brexit, it is the key challenge facing firms over the next three years. The problem is even more pressing in Dublin, where international competition – particularly from well-known UK law firms entering the Irish market – is putting pressure on salaries and making staff retention and recruitment a harder challenge.
Significant pay increases continue to be a feature in the legal sector and are outstripping inflation. Salary inflation appears inevitable as firms continue to rely on lateral hires as a route to growing their teams and adding specialisms – 50% of top 20 firms continue to prioritise hiring from other legal practices.
There is an increasing focus on retention: although salaries continue to increase, there are signs that firms recognise this is not the only way to hang on to their best staff with technology and remote working becoming a priority as many seek to improve work/life balance for their staff. Our survey results show that female equity partners account for 35% of all equity partners and a majority of those surveyed (55%) now have more qualified female solicitors than male.
The partnership structure of Irish law firms remains a significant barrier to prospective merger and acquisition activity. Our survey indicates that 59% of firms (87% of the top 20) will move to an LLP structure in the medium term.
Most firms expect merger and acquisition activity to pick up in the year ahead. As it stands, we have seen some early-stage activity but little has come to fruition to date. According to our survey, the number of firms approached with a view to a potential merger or team acquisition has slightly increased this year to 50% (41% in 2018). However, the number of top 20 firms approached is markedly higher at 80% (67% in 2018). This higher level of activity is primarily driven by Brexit, with UK (and international) firms eying their Irish counterparts as a potential EU foothold.
With 40% of top 20 law firms citing Brexit as their number one challenge, it is clear that the uncertainty is taking a toll on firms with exposure to international clients and markets.
Nearly half of all respondents and three quarters of the top 20 regard Brexit as a threat to their business. 70% are more pessimistic about the impact of Brexit this year than they were a year ago and just 5% said their concerns have decreased. Last year, a sizeable minority of firms believed that Brexit might be good for business. This optimistic view has dropped to around a fifth this year.
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