Smith & Williamson: Law firms confident yet challenged

20 November 2014 2 min. read
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The business outlook in the legal profession has reached its highest level since 2006, reveals a new research from Smith & Williamson. Yet at the same time, law firms still find themselves facing several challenges in an increasingly competitive environment.

For the 20th year in a row, professional services firm Smith & Williamson conducted a research into the key market trends and developments in the legal sector. For its so-called ‘Legal survey 2014/15’, the consulting firm interviewed managing partners and senior management from 98 of the top 250 UK-based law firms. 

Legal Outlook and Challenges

The survey found that levels of optimism in the industry are very high. Almost all of the firms taking part (96%) are confident about the coming year, up from 82% last year. At the same time, competition in the law market is heating up, according to Smith & Williamson, with three-quarters of respondents saying that the legal environment has become more competitive in the last 12 months. Pressure on fees and maintaining profitability are seen as the biggest challenges. “In light of this, improving efficiency and controlling costs will be as important as ever,” write the consultants.

Organic growth and recruitment of lateral hires, followed by cost control, are overwhelmingly seen as the most important routes for firms to enhance profitability in the next 12 months. By contrast, just over a quarter (28%) of firms have set up a new service line in the past year, although 42% plan to do so in the next 12 months.

Mergers and Acquisitions
The research also looked at M&A activity in the legal market. Interest has dropped, say the respondents, with the number of firms expecting to merge or seeking a merger partner in the next 12 months falling from 29% to 21%. Of those, 80% say they would be the larger party if their merger completes. Almost all mergers are expected be with other firms of solicitors.

People and M&A in Law

From a human capital perspective, staff recruitment and retention, followed by partner performance, are some of the biggest issues facing the legal profession. The survey reveals that the partnership model is facing a number of significant challenges, not least the new tax rules affecting salaried partners – 63% of firms say that they are affected by this. Meanwhile, some three-quarters of firms surveyed say that they still lack a formal approach to partner retirement, in spite of the significant impact this can have on a firm. “The ticking time bomb of later partner retirements, combined with insufficient pension planning, will no doubt cause internal tensions and growing headaches for firms if left unattended,” warns Smith & Williamson.