For 25 years, Smith & Williamson has produced an annual law firm survey that seeks to test the mood of market confidence, assess opportunities for growth and uncover the challenges that firms are having to contend with.
The messages coming out of this year’s survey, undertaken in collaboration with The Lawyer, are clear. They show that firms’ concerns are focused on the retention of top talent in an increasingly competitive market as well as the need to maintain investment in technology to keep ahead of the competition and to keep the threats from cyber attacks at bay.
It is noteworthy that both concerns would not have been top of mind, or even existed, 25 years ago. The managing partners of today were the trainees of their firms back then. Legal market technology was in its infancy, with email only just beginning to creep into law firms, while the Blackberry would not arrive until the end of the 1990s.
The internet was barely more than an idea in the business world and the digital age we now take for granted had not yet given us cloud computing, web-based services and all the security headaches that have come with this digital revolution.
Looking ahead, there is artificial intelligence, machine learning and blockchain – what will their future impact be?
Confidence and competition
Confidence across the legal market has been measured since the first publication of the report. The survey has tracked the highs and lows of the legal sector alongside UK and global economic trends, providing a startlingly accurate barometer of forthcoming cycles.
This year, confidence appears to have taken a significant dip after last year’s all-time high, with the US-China trade war, tensions in the Gulf, the ongoing Brexit saga and signs of a weakening global and local economy all taking their toll.
Running alongside this dip in confidence is the continued expectation that competitive pressures will continue to emanate from current direct competitors alongside growing concerns of international firms and the Big Four accountancy firms.
Corporate structures and strategies for growth
For the first time, this year’s survey asked about corporate structures and whether the traditional limited liability partnership model still best serves the needs of the business.
There is a clear sentiment in the legal sector that being a pure LLP is not necessarily the best structure to take organisations forward into the next 10 or 20 years. This is a sign of just how much the legal sector has been changing over the past few years.
Although mergers and acquisitions continue to play their part in reshaping the industry, an increasing number of firms are becoming PLCs. Firms that do not want to go down this path are finding creative ways to increase flexibility within the business models, with a growing number of services off-shoots as firms expand into other related areas.
Twenty-five years ago, firms stuck to the practice of law; today they are expanding into consultancy-based services.
The war for talent
Back in 1994 the movement of partners between firms was the exception rather than the rule, with trainees building a lifetime career at one firm. Today, retaining the right people is reported as the number one concern by 53 per cent of respondents.
Partner moves are common, often highlighting tensions between UK and US firms. However, the new law companies and the Big Four are also posing a challenge to the traditional law firm model by offering a greater level of flexibility in working patterns. Key examples would be the continuing success of Peerpoint or Vario.
Non-legal roles also continue to increase, with Clifford Chance announcing an A-level apprenticeship training scheme to build its next generation of legal project managers, and Norton Rose Fulbright launching a graduate scheme focusing on legal operations.
These two initiatives show how things have changed in the past 25 years. Firstly, these roles would not have existed; secondly, firms would not have considered employing non-graduates.
Growth and acquisition strategies
Our survey asked firms what they saw as the big opportunities open to them over the next few years.
Respondents indicated a focus on specialist sectors, with 32 per cent selecting this as their first choice, followed by investments in technology (15 per cent) and then merger and acquisitions (12 per cent) to comprise the top three.
Geographic expansion was once again low down the list with only 13 per cent of respondents citing this area as an opportunity over the next few years. This tallies with responses to questions around future expansion plans where just under 50 per cent of respondents said they had no plans to expand in the next 12 months, while the majority of those that did have plans were intending to focus on the UK (38 per cent).
Investments in technology continue to dominate both law firm budgets and their strategic direction. The focus is on improved efficiency and client integration through greater transparency and collaboration.
Looking at the focus of technology investments over the next 12 months, pricing analysis was listed as one of the top four priorities by 78 per cent of respondents. By analysing the data in a practice management system, firms can identify matters of a similar nature and interrogate historical billing information to identify future pricing models.
However, pricing analysis is just one piece of a more complex puzzle which incorporates efforts to enhance the client experience with collaboration and communication tools to create a transparent client engagement experience. As one partner put it, “we focus on transparency and immediacy so the accounts should never come as a surprise to the client”.
When firms were asked which technologies they would be increasing investment in, cyber security was reported as the number one focus.
A total of 31 per cent of respondents indicated that they will significantly increase investment in these systems to enable their firms to stay on top of security and deliver robust systems to keep client data secure.
Running a close joint second, with 30 per cent planning to significantly invest, are the automation of manual processes and enhancing the client experience (last year’s top investment area). These results indicate that firms continue their pursuit of improved efficiency with the client at the centre.
Little movement on lock-up
Every year for the past 25 years firms have said they would improve lock-up and every year the figures only show a marginal change.
This year is no exception, with 36 per cent of survey respondents saying that improved lock-up will be the key source of increased funding over the next 12 months and 79 per cent expecting a slight or significant improvement in lock-up over the next 12 months.
The focus for improved lock-up appears to centre around improved information for partners so they can make better billing decisions.
In a few larger firms, these activities extend further into providing client access to matter-related information, so providing transparency across the billing process.
Coupled with ‘agile’ and accurate time capture, the firms that have invested in these systems and processes can potentially reap large rewards.
Brexit’s final act?
The 47:53 division as to whether Brexit will offer up opportunities or create increased threats to business follows last year’s survey in a continued division of opinion that closely mirrors the referendum of three years ago. Any speculation on Brexit at this late stage would be folly as we are weeks from the next crunch deadline of 31 October.
In summary, the legal sector is facing its most significant period of change and disruption since this report was first produced 25 years ago. Law firms are focused on managing their response to new competitors by investing in legal technology, designed to create more efficient delivery of client work, and by considering alternatives or add-ons to their current corporate structures.
These changes are being orchestrated in one of the most politically and economically unstable periods in modern times. There is no doubt that the legal sector will continue to thrive but there will be casualties along the way. The shape and structure of firms making up the legal sector will see considerable change over the next few years.