How the economy has impacted law firms
How the economy has impacted law firms
At the beginning of 2023, several legal commentators predicted the economic environment was likely to be challenging for the legal sector. So some of the UK’s largest firms confirmed they were approaching the year cautiously. Fast forward 14 months, and the prospect does not appear as gloomy, with more optimistic views being put forward.
Price Waterhouse Coopers recently published the 32nd Annual Law Firms’ survey, which sets out the financial results and trends over the last year. It found that although the legal sector has experienced a robust year, there are still some challenges ahead.
Firms, on average, appear to have achieved fee income growth in the face of macroeconomic unpredictability. However, inflation has led to a fall in real terms fee income for many firms, with pricing remaining a key area of focus.
In addition, costs pressures such as increasing salaries and other costs led to 44% of the Top 100 performing firms suffering a fall in profits. Therefore, as we move into the next year, firms will need to consider controlling costs by introducing radical changes to their operating models. This includes firms introducing innovative thinking on how and where they deliver services.
Around two-thirds of the Top 100 firms expect generative AI will have a positive effect on margins and revenue. Investment in on-demand delivery of IT resources over the internet, such as cloud, appears to be a leading priority. However, many firms still lack a fully unified data platform vital for utilising AI to its fullest potential.
Postivie news for the law sector
But there is some positive news. The challenging economic situation has not negatively affected fee income for global firms whose headquarters are in the UK. That said, profit growth has reduced in the past year because firms have found it difficult to pass increasing staff and other costs onto clients. This has led to weaker profit performance. International profit fell by £9.8m for the Top 100 firms, whilst UK offices contributed £12.7m to global profit growth.
Above inflation cost increases have also affected support areas such as IT, insurance, and marketing, reducing budget surplus at year end. To successfully reduce these costs, firms may need to treat them as part of wider shift of their operating models. Even so, fewer than 20% of the Top 25 global law firms give reducing costs as a top three priority for business support over the next 12 months.
With the impact of the economy on the housing market, legal firms can expect a fall in transactional work, such as commercial and corporate property. But this may be balanced by an increase in areas such as restructuring and litigation. Nevertheless, there will always be certain areas of practice where work is always there regardless of the fluctuations in the economy. Family, matrimonial work and probate are three areas that will always buck the trend.
Firms are naturally reluctant to let staff go, as it can be difficult to re-hire them when the economy improves. Instead, they may consider retraining and reskilling fee-earners and moving them into busier areas of practice.
A people problem?
Industry leaders believe the war for talent is likely to continue into 2024 and beyond. Law firms are conscious of the need to retain good people, and must be as creative as possible to keep people on. Managing budgets and salaries are likely to be a big part of next year, with the significant increase in salaries illustrating how competitive the market has become. It is important in the race to keep talent, that firms ensure they hold themselves accountable for diversity and inclusion.
Restructuring bounce
Increased restructuring, insolvencies, and distressed asset sales are a natural consequence of economic downturn. This provides opportunities for investors to take advantage of distressed prices and look to acquire firms with discount valuations. Transactional activity appears to have improved during the latter half of 2023 because buyer and seller expectations have adjusted to higher inflation and cost of borrowing.
In summary, the range of challenges discussed above is likely to test firms in new ways. Moving into 2024 remains challenging for the legal industry, but maintaining flexibility and continuing to innovate allows firms to find new opportunities.
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