Macroeconomic volatility, cyber threats and speed of technology pose main concerns for UK law firms - PwC Law Firms Survey 2023

• 87% of Top 100 law firms concerned that macroeconomic volatility will impact future growth ambitions - but over 90% still expecting to increase revenue and profits in FY24
• 69% of Top 100 believe GenAI will have a positive impact on revenues or margins but caution being exercised over rapid technological change - cyber security spend tops £6m among top 10
• Top 10 identify US firms as greatest competitive threat

UK law firms have cited macroeconomic volatility as their greatest concern, but this has not scuppered growth ambitions, with 100% and 93% of Top 100 firms expecting to increase revenue and profits respectively in the next year (by an average of 9.3% for revenue and 8.2% for profits), according to PwC’s Law Firms’ Survey for 2023.

In a market battling inflation and high running costs, average fee income growth of between 8.0% and 9.7% is expected across the Top 100 bandings. However, with average inflation across the year approximating 10%, in real terms, fee income fell slightly.

Considering risks, the Top 100 cited macroeconomic volatility as their top concern, with 87% either extremely or somewhat concerned that this will impact future growth ambitions over the next two years.

This was followed by cyber threats (85% extremely or somewhat concerned), with firms responding through investment into both people and technology. The number of dedicated Cyber Security Chiefs/CISOs has increased alongside rises in cyber security spend: Top 10 (up 21% to £6.1m), Top 26-50 (up 41% to £1.1m) and Top 51-100 (up 67% to £396k) firms. Top 11-25 firms reduced their cyber spend by 16% to £1.1m.

Inability to recover cost inflation through pricing ranked third (73%), as inflation has added further pressure to high salaries and other costs in the sector, with a significant number of firms struggling to pass increased costs onto their clients.

The number one concern in 2022’s survey, shortage of talent (65%) was the fourth highest concern for firms in 2023, and increased through the bandings: (Top 10: 33%; Top 11-25: 57%; Top 26-50: 69%; and Top 51-100: 82%). This point reflects trends seen more broadly among people-led services businesses, where the war for talent has seen smaller businesses struggle to match the financial packages and career opportunities typically offered by larger organisations.

Generative AI - opportunities sensed but cautious approaches limit exploration

As the most significant emerging technology, AI is presenting both a disruptive risk and a competitive opportunity to the legal sector. Most firms see a chance to benefit from the disruption, though few have taken meaningful steps to capitalise on the opportunity so far.

Of the Top 100, 69% believe GenAI will have a positive impact on revenues or margins. This view is largely consistent across each banding (Top 10: 66%; Top 11-25: 79%; Top 26-50: 65%; and Top 51-100: 67%). Others, however, fear AI will either lead to a reduction in demand, or limited financial upside with efficiency gains passed on to clients.

Several new tools specific to legal services which leverage the capabilities of GenAI have already emerged. These include Harvey (a tool for contract analysis, due diligence, litigation, and regulatory compliance built on GPT-4) and ContractPodAI LeAh (contract drafting and reviewing tool). Against this backdrop, the speed of technological change was recognised as a risk to growth by 71% of Top 100 firms in the medium term (FY25 to FY28), up by 27 percentage points from 2022.

The survey data found that despite wide acknowledgement of the risks and opportunities of GenAI, 38% of Top 100 firms had not done anything with respect to this new technology. Additionally, only 9% of Top 100 firms are actively developing technology alongside Gen AI providers. The majority of these firms were among the Top 25 and could arguably hold more investment aptitude to explore emerging technologies due to their size.

People, growth ambitions and competition

Despite a turbulent economic climate and challenging market conditions, firms continued to grow total headcount over the past year by 1.8% (Top 10); 3.3% (Top 11-25); 2.4% (Top 26-50); and 2.9% (Top 51-100). Narrowing this down to fee earners (including partners), headcount rose across all bandings by 2.2% (Top 10); 2.4% (Top 11-25); 0.5% (Top 26-50) and 2.7% (Top 51-100). 

The organic growth strategies most Top 10 firms were actively pursuing related to ‘Hiring key practitioners, relationship owners or rainmakers’, ‘Focused practice / service innovation’ and ‘Innovative legal service solutions’ (all 83%). In terms of inorganic growth, ‘Lateral hires/team grabs’ was the only area being consistently pursued by most firms: (i) Top 10: 100%; Top 11-25: 57%; Top 26-50: 88%; and Top 51-100: 78%.

No firms in the Top 100 were actively pursuing alternative funding or ownership structures in the next 3-5 years, but a small number said they were considering minority investment from private capital investors (Top 10: 17%; Top 11-25: 7%; Top 26-50: 6%; and Top 51-100: 11%).

‘Legal process outsourcing’ (83%) and ‘contract/flexible lawyers’ (67%) were the most common areas of current service expansion beyond traditional legal services in the Top 10. ‘Contract/flexible lawyers’, ‘legal operations consulting’ and ‘tax consulting and advice’ were most common in Top 11-25 firms, all at 36%. Only a minority of Top 51-100 firms had currently established service expansion beyond traditional legal services. 

Top 10 firms identified US law firms as their greatest competitive threat and for bandings outside the Top 10, it was direct peers in the UK. Legal functions retaining more work in-house was also a recognised competitive threat across the Top 100.