Big law firms abandon external investment in the face of volatility

Wolstenholme: Firms need to look at innovation

None of the top 100 law firms are “actively pursuing alternative funding or ownership structures”, such as listing on Stock Exchange, for the next three to five years, a survey has found.

But despite concerns over “macroeconomic volatility”, firms were optimistic about their ability to increase revenue and profits this year.

Seven out of 10 believe that generative artificial intelligence (AI) will have a positive impact on revenues or margins, the 32nd annual survey of the top law 100 firms by PwC has found.

Macroeconomic volatility came top of the list of risks, cited by 87% of law firms, followed by cyber-threats and “inability to recover cost inflation through pricing”, cited by 73%. Shortage of talent, which topped the list last year, came fourth.

All firms nonetheless said they expected to increase revenue this financial year, by an average of 9.3%, with 93% expecting to increase profits, by an average of 8.2%.

Staff numbers grew in the last financial year by 1.8% for top 10 firms and 3.3% for those in the top 11-25, with slightly lower rates for the rest.

While no firms were pursuing alternative ownership or funding structures, a small number were considering minority investment from private capital investors.

The three leading organic growth strategies actively pursued by top 10 firms were “hiring key practitioners, relationship owners or rainmakers”, innovative legal service solutions and “focused practice/service innovation”.

In terms of “inorganic growth”, the top 10 law firms were all pursuing ‘lateral hires/team grabs’, along with a large majority of other firms.

Despite optimism over generative AI, the speed of technological change was recognised as a risk to growth by 71% of the firms over the next three years – a significant increase on last year.

Researchers said AI was “presenting both a disruptive risk and a competitive opportunity” for 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.” A large minority of law firms, 38%, had “not done anything” with respect to the new technology.

Only 9% of firms were actively developing technology alongside generative AI providers, mostly firms in the top 25, which researchers said “could arguably hold more investment aptitude to explore emerging technologies due to their size.”

Legal process outsourcing, cited by 83% of firms, and contract/flexible lawyers (67%), were the most common areas of service expansion beyond traditional legal services in the top 10.

However, only a minority of firms in the lower half of the top 100 have so far expanded traditional legal services.

Kate Wolstenholme, leader of PwC UK’s law firm advisory group, commented: “Firms have achieved fee income growth but in the context of high inflation and reducing profit margins.

“Going forward, firms will need to consider cost control in the context of more radical changes to their future operating model and bring innovative thinking to how and where services are delivered.

“Law firms remain optimistic about future growth, but for many, this will be dependent on investment in a robust and future-proofed technology and data strategy.

“Cloud modernisation and migration is a top IT strategic priority, with many firms still lacking the fully unified data platform which is essential to leverage AI to its maximum potential.”

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