Smaller law firms to prioritise spending on recruitment and AI


People growth: Firms eye organic strategy rather than M&A

Smaller law firms have recovered their confidence in the future, with hiring more lawyers their joint top spending priority the next 12-18 months, new research has found.

Technology is their other spending priority, driven in part by the potential of artificial intelligence.

Researchers at LexisNexis found that 63% of law firms were planning to grow organically over the next five years.

“This is a sharp rise from only 40% of firms in 2023, although on par with findings from 2022 and 2021,” they said.

“This suggests the dip in organic growth ambitions seen last year was a knock-on effect of the economic crisis, and hints that small firms are hoping for stability over the next 12 to 18 months.”

The LexisNexis 2024 Bellwether report, Lessons on law firm growth, was based on responses from 265 lawyers at smaller firms – nine out of 10 with between two and 20 fee-earners.

The proportion of law firms contemplating growth through merger and acquisition (M&A) dropped from 13% to 10%; none of the firms with more than 20 fee-earners were considering it.

The most commonly cited risk of M&A was finding the right partner, followed by the financial risks and loss of autonomy. Almost half said the main benefit would be growing their client base, while over a third eyed higher overall profitability.

Some 56% of respondents identified spending more on technology and hiring more lawyers at spending priorities over the next 12-18 months; the proportion saying they would be investing more in marketing slumped from 79% last year to 49% – but that is still around double the figure in 2022 and 2021.

Unsurprisingly, the most successful tactic by far for generating work from new clients was word of mouth, followed by cross-selling opportunities from colleagues, online marketing and customer reviews.

Just under a third of lawyers (32%) said their firms would invest in more technology due to artificial intelligence, and 29% said their firms will be more profitable as a result of using it.

However, client expectations may also have played a part, with 83% of firms noting increasing expectations for faster communication and response times.

When it came to challenges over the next 12 months, keeping up-to-date with changes in the legal industry and the law (70%) led the way, just ahead of meeting compliance regulations (69%).

These were closely followed by attracting new business, cybersecurity and the cost of indemnity insurance.

Researchers said the top cybersecurity risk factors were lack of awareness of good practices among colleagues and clients, along with a more general lack of expertise and understanding, but cost was almost as important.

When it came to staff satisfaction, most appeared happy to be working at small firms – only 10% wanted to move into roles at larger firms within the next five years; 62% planned to stay at their current firms. Two-thirds of the sample had previously worked at either large or mid-sized practices.

The report concluded: “Most smaller firms are successful because they have carved out something special, a niche client offering, exciting career opportunities, a team of inspirational leaders, or a purpose that goes beyond the realms of revenue…

“After several tumultuous years, the legal market seems finally primed for growth.”

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