There are other significant challenges: margins are under pressure and there is an increasingly competitive market for talent. Pay increases of more than 6% were experienced by most Top 20 Firms and by 4 in 10 of the wider market. In addition, the sector must contend with the entry of UK and international firms, plus issues around cybersecurity and disruptive technologies.
Many firms are presenting a robust response to these challenges: The market for lateral hires is buoyant and investment in technology is helping improve working practices and client service. However, these responses are not evenly spread. Smaller firms are often under-investing, opening up a meaningful gap with their larger peers and making them less competitive. The outlook for the sector as a whole is positive, but some firms may find they are not able to participate as expected.
Firm Performance, lock-up and working capital
Revenue growth remains strong in the legal sector as a whole with nearly seven in ten firms enjoying increased revenues, but margins are under pressure. Higher wages – notably from increased competition for talent – alongside rising office costs, are hurting profitability. This is a trend likely to persist.
Lock up remains a structural barrier to investment for many firms. The financial demands on law firms are significant, including higher staff costs, investment in technology and IT security. The failure to address debtors and work in progress leaves many firms with a limited capacity to invest in people and technology. Firms risk becoming progressively less competitive without steps to address these issues.
Talent, training and development
Sourcing, hiring, training, developing and retaining quality individuals is the key to survival, future growth and success and recruitment and retention of staff remain key priorities for the profession. With 40% of solicitors aged 39 or less and more female solicitors in the profession, firms need to address flexibility.
The increasing scale of large firms and the establishment of new greenfield set ups from UK headquartered firms is creating greater competition for solicitors. Over 50% of Top 20 firms (25% of all firms) believe lateral hires are a key opportunity for them over the next 3 years, but this approach is inflating salaries and making retention more difficult.
The training of solicitors is under review by the new Legal Services Regulatory Authority (LSRA). Is training fit for purpose? 55% of respondents believe it is, with higher satisfaction among the larger firms. Those with reservations see the current training regime as too general, not practical or reflective of the job. The Law Society has engaged leading experts with the aim of addressing the problem.
Investment in technology has been trending higher in recent years but was below trend for 2018. Only 13% of firms report that IT investment is an immediate priority in the next 12 months.
A notable gap is opening between big and small firms, with Top 20 firms investing more than smaller firms by some margin. This is particularly the case in areas such as document management, client service initiatives and remote working, where under-investment by smaller firms may result in a loss of competitive edge.
Cybersecurity continues to rise in importance for law firms with 79% of firms (73% of Top 20) reporting it as their top issue in 2018 compared to 70% of firms in our last survey. The UK ransom attack on a large law firm, in June 2017, was an alarm call for all law firms.
Few firms are exploring cutting edge technology such as artificial intelligence. For many, the technology is too young, and the commitment in terms of cost and implementation too high. Nevertheless, it remains one to watch for the future.
With the Brexit outcome still uncertain, our survey found that 55% of all respondents are more concerned about the impact of Brexit than 12 months ago. However, firms are divided as to whether Brexit will ultimately prove to be an opportunity or a threat.
Around one third of the Top 20 firms see Brexit as one of the biggest challenges to their firm over the next 3 years, with three in five firms believing it will pose a threat to revenues and profitability. Around half of the Top 20 have prepared a Brexit strategy; these are companies with an international client base and the threat is tangible. Among firms in general, with greater relative domestic exposure, concern drops significantly.
Uncertainty has led to inertia, but law firms need to carry out a Brexit impact assessment on their services, their client base and their key individuals to ensure that they are not vulnerable to losing clients or staff losses. There will be opportunities arising from Brexit for those firms that are most prepared.
Significant mergers in the Irish legal sector have been few and far between over the last five years. Where they have happened, it has been among smaller firms, designed to deal with effective succession or to deliver scale in a particular specialist area. The growth of larger legal firms has been mainly organic, supplemented by lateral hires and expansion into international markets.
Increasing scale, or diversification of legal services, new service models and geographic expansion are other motivations for merger and acquisition activity.
However, today Brexit is the key driver of activity with 60% of the Top 20 firms reporting they have been approached in the last 12 months by a UK firm.
The structure of Irish law firms remains a significant barrier to M&A activity. It is our view that over time the introduction of the LLP model will increase M&A activity in the legal sector as the partnership business model restricts a firm’s ability to merge with or acquire other law firms.
Based on findings of independent research carried out in September and October 2018. For full details and context download the full report at smithandwilliamson.com/en-ie
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