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2019 Law Firm Benchmarking: Where next?

12/09/2019
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At the time of writing, the Law Society has estimated that a ‘disorderly’ no-deal Brexit could leave a £3.5 billion hole in the legal sector. Firms are clearly mindful of the wider economic and political conditions but are far more focused on ‘controlling the controllable’ than worrying about headlines. For now, it is all about managing current operational risks and adapting how teams deliver their work.

More than 70% of firms have a positive outlook for the next 12 to 18 months. This is set against a backdrop where approximately 90% of participant firms felt that the economy would either stand still or be more challenging and 80% of participants thinking the same for the legal market. 

It is interesting to see that firms are optimistic for their own future performance, but why could this be? Is it because management teams believe the future will bring change which creates business opportunities that they can capitalise upon? Or is it that they are being optimistic that current economic uncertainties will become clear and they will be back to ‘business as usual’? Perhaps they are simply confident that their firms are flexible and adaptable enough to meet future needs.

Business critical risks…

When it comes to the top three risks to their business, city and regional firms are in agreement on what matters most.

Top three business critical risks

 Retention of our key people

 Cybercrime and fraud resilience

 Availability of people with the skills we need 
 retention cybercrime
skills

It is no surprise that retention of our key people is seen as business critical – your best people do more than deliver the work; they help shape the firm’s culture, define its client service and provide innovation for future improvement projects. 

Last year, firms reported that a clear progression path, market rate remuneration package and a strong firm reputation were all deemed very important to retain the best people. All of these remain ‘must haves’ but firms are also adding agile working into the mix. With a continued focus on talent retention, 28% of regional firms also plan to change their employee benefit structure in the coming 18 months. 

Keeping track of the ever-changing threats from cybercrime and fraud continues to be a burden for all law firm leaders and the investment in both time and cashflow can be significant. However, this investment wouldn’t be as significant as the impact of a serious fraud or data breach. 

An average organisation should expect losses owing to fraud to account for between 3% to 6% of turnover, although in some cases it is as high as 10%.

Jim Gee, Crowe
The Financial Cost of Fraud 2019
 

While many firms undertake periodic review of their digital hygiene,  authorisation controls and data protection processes, the threats are fast-paced and criminals are becoming even more innovative. It is likely that the move to a live, continuous monitoring programme will become the norm for all firms in the near future as they try to stay ahead of hackers and protect themselves and their clients from loss. 

Financial outlay here should be seen as an investment, not a cost. Visible, robust information and transactional security could easily become one of the defining factors for law firm clients when they choose their advisor.

...and the lower priorities

While the risks deemed to be business critical and higher priorities are as might be expected, there were a few surprising areas that firms consider a lower priority risk. 

Despite much commentary on the potential for emerging tech-based and ‘new model’ firms to disrupt the market, most firms considered this to be a lower priority risk, along with the availability of funding and impact of Brexit. 

While these risks are heavily driven by external factors and not so easily controlled, it remains important for firms to undertake a degree of scenario planning to ensure they are prepared for those big, often unexpected, sector‑wide changes which create huge opportunities or threats to the firm.

The new SRA Standards and Regulations

The Solicitors Regulation Authority (SRA) has now confirmed 25 November 2019 as the ‘go live’ date for its new regulatory model with a focus on simplicity, flexibility and improving access to law. There are a number of key changes, including:

  • new Accounts Rules which are much simpler and more principles based 
  • separate codes of conduct for firms and individuals 
  • permitting freelance solicitors to provide reserved legal services
  • allowing solicitors to carry out non‑reserved work when operating within a business that is not regulated by a legal services regulator.
Are you thinking of using a Third Party Managed Account (TPMA) for your client money handling?
If so, you are in the minority against our sample. Not one of our participants is planning to use a TPMA in the coming 18 months.
 

There appears to be a difference of opinion between city and regional firms as to the benefits of the new regime. City firms view the changes to be minimal or a slight improvement on the current handbook, with fewer than one in 20 considering the new framework to be worse. 

Regional firms are more polarised in their view; more than a quarter of regional firms view the new standards as worse or significantly worse than the current regime, but the same proportion see benefits and improvements.

Our view is that the new standards are evolution rather than revolution but do allow greater flexibility for those who choose to do things differently. The promised issue of more regular, timely and dynamic guidance by the SRA is likely to have a greater impact on firms as they will need to be able to respond quickly and demonstrate their resulting considerations and actions.

Catalysts for change in the UK legal market

The new SRA Standards and Regulations permit much more flexibility for solicitors to operate outside of the traditional SRA authorised firm, for example as freelancers or within other professional services firms. It is interesting to note that firms do not currently view this as something that will have a big impact upon the sector. 

So what do law firms think the future holds? The answer is that there is no clear view. Just over a fifth of regional firm participants think the biggest change will come from consolidation in the market, and this proportion rises to 37% of city firms. In our experience, there is greater activity and more merger conversations than there has been for quite a while, particularly amongst smaller firms who are dealing with succession planning. 

When it comes to competition, city and regional firms identify different forces for change. A fifth of city firms believe the Big Four accounting firms and other professional service providers taking market share will have a marked impact on the sector. Contrast this with the one fifth of regional firms who see the rise of unregulated law firms as being a bigger cause of disruption.

Download Law Firm Benchmarking 2019 [pdf]

2018/2019 highlights

This year's headline results show another year of steady performance. But look a little deeper and we find greater volatility in both revenue growth and profitability.

View Benchmarking hub

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Our professional practices team advises law firms of all sizes on their growth plans, always tailoring our advice to best suit their needs.
Louis Baker
Louis Baker
Partner, Head of Professional Practices
London
Steve Gale
Steve Gale
Partner, Professional Practices and Head of Audit
London
Ross Prince
Ross Prince
Partner, Audit
Midlands