Investment: Greater focus on the law
Regional law firm consolidators are outperforming other disruptive models in the market and also the biggest practices in the country, an analysis by PwC has shown.
Its UK Legal Services Market Report also found law firms outside the very biggest increasingly worried about how artificial intelligence (AI) could erode their prices.
PwC said the UK legal market was worth around £40bn in 2024 and was expected to grow at 5.1% annually until 2029.
Corporate legal services (6%) were set to grow at twice the rate of the consumer sector due to both volume – such as increased M&A activity, and new immigration and employment regulations – as well as “pricing growth”.
Now 14 years into the liberalising impact of the Legal Services Act, PwC said: “We are now witnessing a genuine diversity of business models and strategies reshaping the sector…
“Specialist law firms have pushed innovation within the core legal framework, refining marketing strategies and diversifying into non-legal services to create additional revenue streams.
“Meanwhile, consultant-based firms, subscription pricing models and digital-first legal services are bringing unprecedented flexibility and efficiency to the sector.”
Combined, these forces have “deepened investor appetite for corporatised law firms that can deploy capital over longer horizons and lead consolidation through M&A”.
There has been a focus in the market on externally backed groups, such as Lawfront and MAPD, expanding through regional acquisitions.
According to PwC, regional consolidators have achieved the highest revenue growth (27%) and EBITDA margins (25%) across the spectrum of corporatised models, “driven by ambition acquisition and integration strategies, alongside more commercial cultures driving cross-sell and optimising pricing”.
And all of these new models were showing “significant outperformance compared to the wider market and the largest UK law firms. We expect continued outside investment into the legal sector will only accelerate the pressures on traditional LLPs”
PwC highlighted the increasing number of deals in the professional services sector – 475 in 2024, compared to 332 in 2019 – and how the focus on accountancy was now moving to law.
“External capital investment can help unlock of number of beneficial value creation levers to accelerate growth and drive outperformance,” the report said.
“However, realising the full potential of many of the levers often also requires a clear focus supported by strategic, operational and cultural alignment.”
AI investment was part of the picture. PwC’s research showed that, on average, law firms expect that more than 10% of chargeable hours could be automated through AI tools.
“While 19% of law firms are seeing some productivity gains, only 2% have monetised benefits. Given the presence of time and materials pricing, the approach to monetising benefits is highly nuanced and may require significant change to pricing models and levels.”
There was a “clear rift” by size of firm: “Almost all of the top 10 expect widespread adoption of GenAI to lead to increased productivity gains that enable them to deliver more work for the same clients.”
But smaller firms were more concerned with price erosion. “This likely reflects clients becoming increasingly aware of the benefits of AI tools or firms feeling that they may be falling behind their peers.”
PwC predicted that firms able to disrupt the existing model “stand to benefit enormously with potential to boost both fee income and profit margins”.
It added: “We expect more corporatised and centralised models could be better positioned to accelerate and capture the opportunity by taking a longer-term view on investment returns and their ability to drive standardisation across their business processes and ways of working.”
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