Future analysis

A look to the future

Confidence over future performance in last year’s survey has had mixed results - predicted fee income levels were generally achieved, but not profit. Given current political and economic uncertainty, firms are more cautious in their outlook this year. In the short term (2019/20), most firms expect modest fee income growth with profit improvement slightly lower.

Key future challenges include the looming Brexit deadline, with more firms seeing Brexit as integral to whether or not they will hit their predicted financial performance. Many (including 80% of Top 10 firms) also view technological change as an important challenge over the next 2-3 years. This is unsurprising for the larger firms, who continue to lead the way in using and developing emerging and digital technologies to improve efficiency and profitability.

Below we outline four key areas and questions law firms need to consider to remain resilient through change.

Four key areas and questions law firms need to consider to remain resilient through change

Brexit

  • Will EU offices need a change in structure?
  • Will processes and procedures need updating for a new regulatory environment?
  • Will the firm’s people be able to move freely to work throughout the EU?
  • Will the firm be able to quickly adapt upon conclusion of Brexit negotiations?
  • Is the firm ready and able to respond to the opportunities that Brexit will bring?

Talent retention

  • Is there a process to spot and nurture talent?
  • Is there clear career progression for talent to progress within the firm?
  • Is there a flexible working culture that meets the needs of the workforce?
  • Is the total package to employees (not just cash remuneration) clear?
  • Does the firm communicate enough and in the right way with its employees?

Cyber threats

  • Can the firm respond quickly and correctly to a cyber event?
  • Are Board members aware of their role and what they would need to do in response to a cyber event?
  • Is there a clear documented business disaster recovery and business continuity plan? Has it been tested in the last 12 months?
  • Do all employees know what to do in a cyber event?
  • Have employees received adequate training in the last 12 months on their role in avoiding a cyber event?

Technology

  • Are the technology ‘basics’ in place that allow the firm to operate effectively on a day-to-day basis?
  • Does the firm have a technology improvement plan?
  • Is the firm aware of all available emerging technologies and do they know which are best for their organisation?
  • Can the firm ensure the security of all new technologies adopted?
  • How will the firm fund the continuing need for technology investment?

At a glance

Fee income and profits 2019 to 2021

  • Firms are cautious about profit performance in 2019/20, but optimistic in the longer term, expecting profit performance to exceed fee income increases in 2020/21.
  • International offices are the biggest contributors to growth for the second year running. Continuing UK economic uncertainty means global firms are likely to continue to focus growth efforts on international operations.

Merger activity by 2021

  • Our survey results suggest merger activity will continue over the next 2 years.
  • There has been a growing appetite for deal activity in the UK legal sector, with 57% of Top 10 firms and 36% of Top 11-25 firms responding that mergers are at least somewhat likely within the next two years (2018: 40% and 27% respectively).
  • Merger types, though, will vary. Larger firms will seek mergers with non-UK based law firms (with UK/US mergers likely to lead the way), while mid-tier firms expect to merge with smaller UK organisations.

Threats to meeting the firm’s ambitions

  • Cyber threats, Brexit, retention of talent and the speed of technological advancements are the threats that most concern law firms.
  • Cyber risk is an area of serious concern for law firms: data security and privacy failures can quickly ruin reputations. It is therefore disconcerting to see relatively low levels of senior management involvement in crisis management exercises, and few firms where cyber risk is managed at executive board level.
  • New market entrants are also a concern for many mid-tier firms - 18% of Top 26-50 and 8% of Top 51-100 firms are somewhat concerned about this threat.

Impact of Brexit

  • Despite uncertainty over Brexit, signs of weakness in global economies, international trade tensions, and geopolitical risk, a majority of firms have still reported revenue and profit growth (albeit at slower rates than we saw in 2018).
  • Firms that have invested in their international offices over the past few years are now reaping the rewards, with revenue and profit growth of overseas offices outstripping that of the UK.
  • Given the macro-economic environment in the UK, and as firms continue to protect themselves against the possible impact of Brexit, we expect to see even greater investment in international markets by the larger firms.

Key challenges facing the legal profession between now and 2022.

  • As the deadline for Brexit gets closer, more firms see this as a key challenge to their financial performance aspirations. While no Top 25 firm reported Brexit as their key challenge in 2018, 20% of Top 10 and 63% of Top 11-25 firms have done so in 2019.
  • Most Top 10 firms (80%) view technological change as their key challenge over the next 2-3 years. This is not surprising, as it is the larger firms who have and will continue to lead the way in using and developing emerging and digital technologies to improve efficiency and profitability.
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Kate Wolstenholme

Kate Wolstenholme

Leader, Law Firms Advisory Group, PwC United Kingdom

Tel: +44 (0)7740 923078

Leon Hutchinson

Senior Manager, Assurance, Law Firms Advisory Group, PwC United Kingdom

Tel: +44 (0)7739 449052

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