Partner caution and client demands “limiting law firm growth”

Macpherson: Law firms feeling held back

The combination of a challenging economy, partner caution about investment, and changing demands of clients will be drags on growth this year, according to a survey of large law firms.

But there is a strong desire for growth, with 42% of respondents predicting that 2024 is going to be one of the busiest years for law firm merger and acquisition activity, including for complementary non-legal businesses.

A white paper from litigation funder and law firm lender Harbour also recorded confidence in the upcoming year’s trading, with 56% expecting increased turnover and 60% higher profits in 2024.

However, the survey of 100 leaders at top 200 firms – commissioned from Hayhurst Consultancy – found them more optimistic about their own firm’s performance than the market as a whole: 43% thought (and only 16% strongly) that 2024 would be a strong year for law firm growth.

Half of respondents cited economic uncertainty as the most significant barrier to growth in the next 12 months – just 5% of law firm leaders said they did not anticipate their firm facing any growth challenges in the coming year.

Other barriers cited included partner resistance to change, market consolidation, the expense of talent attraction and retention, and a lack of access to external investment capital.

Two-fifths of respondents said persuading partners to make investment in the firm from their own capital, or seeking external investment, was one of the top three barriers.

Harbour said the findings underlined the challenges for firms in balancing their finances: “At one end, partners are cautious about using cash reserves or their own capital to invest, while at the other end cash flow is squeezed by clients looking for more time to pay their bills (36% of respondents said they were offering clients longer payment terms), and clients seeking flexible fee arrangements.”

Four in 10 also said they thought that clients were increasingly shopping around for better rates.

The report said: “Even as law firms have become more entrepreneurial, their underlying partnership structure can reassert itself when it comes to profits and investment – the reality remains that most firms distribute most, if not all, of their profits in the traditional manner.”

Whilst there might be good reasons for doing so, it meant investing in the growth of the firm needed to be done in a different way, it went on.

Just 2% of respondents said they financed themselves entirely from operating income, with other forms of funding (partner/shareholder investment, bank overdraft, litigation funding, private equity investment) all used by a significant minority of firms.

A third said their firms were actively considering using credit facilities from litigation funders, from whom they already sourced funding for clients’ claims.

Ellora MacPherson, managing director and chief investment officer at Harbour, said: “The fast-growing demand for Harbour’s working capital facilities indicated to us that the market dynamics are changing.

“We commissioned this report to better understand the reasons behind this change. It appears law firms can see opportunities for growth but feel held back by economic uncertainty and increasingly limited access to capital for investment.

“At a time when firms face several headwinds simultaneously, the message for them is that credible options exist which can unlock the door to the many exciting possibilities for the development of their business, not least the adoption of AI, whilst also allowing them to address other macro-economic financial challenges.”

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