Law firms not responding quickly enough to new competitors

Knowles: Strong growth in ALSP market

Traditional law firms are failing to adapt quickly enough to respond to new competitors, or to differentiate their services by offering alternative approaches, research for listed law firm DWF has found.

It came as the firm unveiled positive results for the year to 30 April 2022, returning to statutory profit after a loss last year.

DWF, the first firm to list on the main London Stock Exchange, is now divided into three divisions: legal advisory, connected services – a range of legal and non-legal offerings, such as advocacy, claims management, forensic accountancy and legal costs – and Mindcrest, an alternative legal services provider (ALSP) that offers managed services.

Chief executive Sir Nigel Knowles said this “integrated legal management approach” was DWF’s key differentiator.

He explained: “We continue to see an evolution in the legal services market, with changing buyer behaviours and an increasing demand for alternative legal services and related business services.

“Our differentiated proposition leaves us really well placed in this regard and we have seen a growing number of our key clients taking services from more than one division.”

He said DWF had commissioned independent research from Thomson Reuters, “the findings of which support our confidence in our business model”.

Sir Nigel explained: “Their analysis shows that the legal services market overall continues to grow, but with the strongest growth in the ALSP market.

“They also found that traditional law firms are evolving but are failing to adapt quickly enough to respond to new competitors, or to differentiate their services by offering alternative approaches.”

He added that DWF’s “ability to provide an integrated solution to our clients’ challenges” was a factor in the net promoter score of +63 found by research company Deep Mind after talking to more than 500 clients.

The 2021/22 was DWF’s first full year under Sir Nigel’s leadership. It reported net revenue (revenue less recoverable expenses) up 3.6% to £350m – or 7% on a like-for-like basis, after the impact of acquisitions and closed or scaled-back operations like in Germany were taken into account.

The firm recorded a 21% increase in adjusted profit before tax to £41m and a return to statutory profit before tax of £22m, compared to a loss of £31m in the previous year.

Gross margin increased by 0.9% to 51.7%, while the cost-to-income ratio improved to 38.4% from 39.2%.

Lock-up days fell by five to 179, the lowest level for six years but still extremely high by most standards.

DWF’s net debt of £72m was £12m higher than the previous year due to the repayment of Covid-19 VAT deferrals and acquisition-related payments.

The DWF board declared a final dividend of 3.25p per share, taking the total dividend for the year to 4.75p, compared to 4.5p in 2020/21. This represents 44% of adjusted profit after tax, against a target of up to 70%.

Investors were told that DWF has “a significant pipeline of M&A opportunities to explore” and was also reviewing its property strategy, with around a third of its global office space considered potentially surplus to requirements post-Covid, representing a “c.£7m annualised saving opportunity in the medium term”.

Sir Nigel added: “Despite the prospect of challenging macro-economic conditions, we remain confident in our medium-term guidance.

“This confidence is supported by the defensive nature of the group’s revenue being weighted towards litigation and the recurring revenue base in insurance, which has always protected the group both from artificial peaks in growth and hedges against a slowdown in transactional activity.

“Similarly, we are confident that our balanced approach of competitive reward, including our unique ability to offer share awards, combined with a more progressive working environment will position us favourably in the ‘war for talent’.”

He acknowledged that attrition levels have increased but argued that “offering more and more money to young people is only a sticking plaster. It is not a sincere, sustainable or healthy solution for anyone”.

DWF has nonetheless conducted a comprehensive pay review while also making share awards to more than 650 staff and reducing the vest period for them to receive such awards in future.

A staff survey found that 89% felt treated with respect by their colleagues and 87% that they could be themselves at work, while 83% felt supported to adopt a hybrid model of working.

DWF listed in March 2019 at 122p and hit a high of 142p shortly before Covid hit, after which the share price fell to a low of 53p. It returned to the original price at the start of this year but has drifted back again since, closing last week on 95p.

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