City law firms are set for a “boom in Brexit-related advisory work” as the UK’s future relationship with the EU becomes clearer, an authoritative analysis has predicted.
It also found that a small majority of large firm leaders anticipate a recession next year.
The annual analysis by Citi Private Bank and Hildebrandt Consulting – published ahead of the election result – focuses mainly on the US market, but also surveys major UK firms and some in other parts of the world.
It said: “Notwithstanding the ongoing political challenge of Brexit, we anticipate that the UK legal sector will perform well in 2020, building on the success of 2019.
“As the country’s future relationship with the EU becomes clearer, we anticipate a boom in Brexit-related advisory work. That said, ongoing political uncertainty has caused certain market segments, notably real estate, to soften.”
It said London remained the “standout growth opportunity” outside of the US, ranking second only to New York in terms of growth opportunities.
“While some believe the London market faces challenges, they are far outnumbered by those who regard the city as a growth opportunity,” it said.
Competition for work and talent was “fierce” in London, but “Brexit will continue to create several years of advisory work for law firms”.
The report added that, so long as London remained one of the world’s main centres for private equity firms and hedge funds, “it is also likely that these industries will continue to fuel the city’s legal sector”.
More broadly, the report said 2019 was “a good year for the law firm industry”, and foresaw top-line growth and profit per equity partner growth of 5-6% next year.
“We also anticipate continued dispersion and volatility, leading to further consolidation.”
With the growing competition from Big Four accounting firms and alternative lower-cost service providers, “we expect that law firms will focus even more so than before on delivering their services more efficiently”, it continued.
“We already see firms promoting their alternative service delivery offerings, which typically focus on lower-cost leverage, eDiscovery and litigation support, automated due diligence, project management, technology solutions and online subscription services.
“For firms who embrace this way of working, revenue is no longer solely derived from billable hours. We anticipate that revenue generated from solutions, as opposed to hours logged, will continue to grow as a proportion of overall firm revenue.
“Given the limited resources available to law departments, we see a growing opportunity for firms to offer legal technology and process improvement services to their clients.”
It said the take-up of artificial intelligence (AI) based solutions has also “increased rapidly”.
Though Citi did not anticipate a recession in 2020, a small majority of law firm leaders did, with a larger majority predicting a recession by 2021.
“This suggests that law firm leaders may be talking themselves into a recession months – if not years – before one actually occurs.
“Even if a recession is not on the horizon, we suggest that law firm leaders should learn lessons from the past and avoid the temptation to overreact. Evidence collected over many years tells us that recessions tend to have a modest impact on the legal sector.
“At worst, firms tend to experience modest falls in profits or revenue, typically by mid-to-low single digit amounts. Moreover, any fall in profits or revenue tend to be short-lived, lasting for less than two years.” It noted too that clients, under pressure to reduce their internal costs, often outsourced more of their legal work during a recession.
“This offers firms an opportunity to win more client work, and further enhance their client relationships.”