“Fundamental market change is on the horizon” for the largest law firms in the country, with the possibilities of technology the driving factor and new business structures and external capital needed to accommodate them, the annual law firm report by PwC has concluded.
It surveyed 55 of the top 100 firms and found that many were not keeping pace with cutting-edge technologies, “or more crucially with growing client expectations”, with only 11% utilising the opportunities of big data and predictive analytics, while more sophisticated technologies like smart contracts and blockchain barely featuring.
PwC also predicted that law firms of the future would not be restricted to the partnership model, which “does not necessarily facilitate future investment”.
It explained: “Rather, they could be multi-disciplinary partnerships, public companies, financial investor-backed private companies, or blended hybrid structures.
“The transformation required to thrive in the new order will be costly and firms will look to alternative sources of funding to pay for it. Furthermore, ‘non-lawyers’ will play an increasingly important role in future law and different structures will better facilitate more equal reward.”
On the financial side, PwC said the landscape “remains difficult” as a result of ongoing economic uncertainty together with growing competition from new entrants and US firms.
“While at least 70% of law firms achieved fee income growth, this was limited to an average increase of around 3%, while half of firms saw UK profits decrease.
“Rising staff costs are a key contributor to the decreasing net profit margins of UK law firms as they grapple with increased fee-earner numbers over recent years coupled with an ongoing decrease in chargeable hours and resulting spare capacity.”
PwC said that what once seemed like a “wish list of irreconcilable demands” from clients – greater efficiency from law firms combined with an integrated global service and deeper understanding of clients’ businesses – now felt in reach due to new technologies and new players, which it said were more willing to use them.
The report said: “The liberalisation of the legal market has led to the emergence of new players in legal services. These organisations are meeting with growing success due to their efficient, lower-cost models which include making far greater use of technology than traditional law firms. The new entrants have space to grow as many traditional law firms have been unresponsive to changing demand.
“At a time when supply already significantly outstrips demand, firms who cannot keep up with this pace of client led change may eventually disappear.”
PwC acknowledged that large traditional law firms have “powerful strategic advantages over new entrants”: strong, trusted brands; well established international networks; long standing client relationships; and talented and highly trained people.
“Large law firms also have a latent critical advantage which they are yet to exploit – a goldmine of data on each of their longstanding clients. Law firms which choose to innovate in order to respond to the needs of clients whilst capitalising on their strategic advantages will come to dominate a smaller number of true global players.”
Technology, process re-engineering and intense competition would drive a growing disparity between premium and non-premium work, PwC forecast, saying this would in turn create increasing tension in the single business partnership model.
“The premium law firms of today will face a critical strategic choice – either to focus solely on the premium work and effectively withdraw from areas where their business model is unsustainable or to embrace new business models where ‘business as usual’ legal services are delivered very differently.”
Most law firms surveyed recognised the challenge – over half of top-25 law firms were ‘somewhat concerned’ about new entrants, while a majority of the them have established or begun piloting artificial intelligence solutions.
The survey added: “‘Client experience’ and ‘Operational efficiencies’ were the most important drivers for emerging technology use, but ‘New services’ had the greatest year-on-year gains. However, the journey has only just begun and more fundamental market change is on the horizon.”
David Snell, partner and leader of PwC’s law firms’ advisory group, said: “Fundamental action is needed to future-proof the shape and operation of the legal sector. Technology will impact all areas, from client service delivery to business support and, importantly, staff recruitment and retention.
“At the moment, the focus seems to be on updating or replacing old systems. Firms need to be more agile in embracing emerging technologies such as AI, which will ultimately help them achieve more effective staffing levels and react faster to changing client demands.
“It is advances such as these that will help set them apart from their competitors in an increasingly competitive marketplace. This will require significant investment and firms need to think carefully as to how this will be funded.”