Nearly 60% of top 100 law firms view mergers and acquisitions as a leading growth opportunity in a challenging legal services market – with the prospect of alternative business structures (ABSs) starting to snap at their heels, according to a prestigious benchmarking survey.
The finding heralds increasing churn among mid-tier firms as they seek mergers with other UK firms amid widespread uncertainty about future prospects for success, the PwC annual benchmarking survey predicted. Half of the top 10 firms plan to buy or join with overseas firms in the next few years.
Meanwhile, the threat of ABSs bringing new competition to the profession is expected to drive an expansion of legal process outsourcing (LPO), it advised.
However, just 11% of firms put making an ABS application themselves among the top three opportunities to grow their business in the next 12 months. In last year’s survey the figure was 7%. Yet the survey said new ABS entrants would use their financial muscle “to make their presence felt increasingly in the high volume (and traditionally lower margin) segment of the market”.
The top growth opportunity (94%) was seen to be better penetration of existing markets, while 51% saw new overseas markets as a key goal. This was particularly true of larger firms, PwC said, observing that half of the top 25 firms sourced more than 40% of fee income from international operations.
Half of the top-10 firms anticipated merging with or acquiring an international firm over the next three years, up from just 17% in 2011.
Overall, 58% of the top 100 firms saw mergers and acquisitions as a major growth opportunity, “with some top 11-25 firms in particular acknowledging the challenges of operating in an increasingly competitive and mature market and recognising that further UK consolidation in the mid-tier is inevitable”.
PwC said LPO/offshoring will “become an increasingly important area for the sector”. It added: “Pricing pressure and the threat of new entrants are together forcing firms to reappraise how they deliver legal services, whilst maintaining quality as a ‘non-negotiable’.”
Business processing outsourcing (BPO) is also “an area of increasing maturity in the legal sector”, although while some firms had embraced it, others “remain to be convinced of the fit with their culture and strategy”. The greatest uptake has been in “outsourcing travel, facilities management, IT infrastructure, payroll and training”.
More than half of firms (53%) have pursued cost reductions in the past two years, although most reported savings of 5% or less, the survey said. None of the top 25 firms had achieved savings of more than 10%, which PwC said was “a surprising result”. The professional services firm claimed that with the right approach, in fact “firms can reduce costs by as much as 15% through simplifying, standardising and (where possible) automating business processes”.
The past year has seen a “step change” in large firms’ attitudes to “governance, risk and compliance” due to regulatory changes such as the need to appoint compliance officers for legal practice and financial administration. But while 85% of top 10 firms have appointed an internal auditor, only 43% of top 11-25 firms and just 18% of top 26-50 firms have done so.
Global economic uncertainty has led to “a difficult and rapidly changing environment for the legal sector”, although 82% of the firms canvassed said their fee income had increased this year. Despite growth having taken place via mergers and lateral hires, once inflation was taken into account, performance had been “broadly flat” for most firms.
In real terms, fees per partner in the 10 largest firms are 22% below the 2008 peak. Among the top 11-25 firms, profit per equity partner is down 31% on 2008. Top 10 firms accounted for an estimated 44% of total fee income across the top 100, with net profits a full 11% higher on average than those of the 11-25 firms.
Headcounts at the largest firms have remained stable since last year, but firms lower down the table have experienced reductions in both equity partners (down 12% in top 11-25 firms) and in overall fee-earners (down 18% in the top 26-50 firms).