Operating differently – Strategy and outlook

2013 Annual Law Firms’ Survey

Law firms are operating in a very different market to that of five years ago. General economic conditions, both in the UK and globally, and clients’ changing needs and behaviours are two of the most predominant factors influencing law firms’ future growth prospects. This is closely followed by competition from new market entrants and increased regulation.

Only a quarter of firms consider an ‘inability to finance growth’ as a key challenge. However, law firm funding is under pressure and firms should not underestimate the potential impact of this. As firms are required to invest to grow, diversify and/or adapt in order to remain competitive, lenders are becoming more cautious and selective with their funding, no doubt in part due to recent high profile failures in the sector. Therefore, we expect lenders to require partners to invest more in the firm if they are going to extend further financing. In addition, balance sheets will come under increasing pressure. For these reasons, law firms will need to review funding strategies and profit distribution policies to ensure adequate cash resources are maintained.

  • The majority of firms remain confident of achieving growth over the next three years, with firms in the Top 25 more optimistic than those outside the Top 25. Despite this, there is still considerable uncertainty regarding the prospects for the legal sector as a whole.
  • Approximately half of Top 50 firms believe they will outperform the sector, with virtually all firms seeing ‘better penetration of existing markets’ as the main opportunity for growth. As a result, pricing and margins will remain under pressure and clear winners and losers will emerge.
  • Lack of stability in the legal market due to general economic conditions and clients’ changing needs/behaviours are seen as the two key threats to business growth, together with over regulation and competition from new entrants to the market. New business models are therefore emerging and firms will need a clear strategy to be able to respond to these challenges.
  • International expansion continues to be a strategic priority for many firms including those outside the Top 25. Australia, USA and Africa are the key regions for growth for Top 25 firms, with the Top 26-50 firms seeking to establish presence in the Middle East, China and the Rest of Asia and the Far East.
  • 83% of Top 25 firms believe a merger is very or fairly likely by 2016 and this is increasingly likely to be with a non-UK based firm. There appears to be less appetite for merger among Top 26-50 firms, although 42% of these firms still consider a merger to be very or fairly likely.