US and UK firms in battle for London market as growth continues

City of London: 10.6% fee growth in first half of FY18

There is “increasing competition” for clients and lawyers between the large US and UK firms operating in London, annual research published by Citibank has highlighted.

It came as new figures from accountants Deloitte showed strong continued growth among the largest City firms.

Citibank’s 2019 Client Advisory – produced in association with Hildebrandt Consulting – mainly takes the temperature of the top 200 US law firms, but looks at other markets too, most notably the UK.

“While Brexit continues to cause political division and economic uncertainty, the UK’s leading legal practices have – so far – been almost entirely unaffected by these developments,” it said.

“In the financial year that ended in April 2018, many firms recorded revenue growth of 5% or more. Undoubtedly, this revenue growth has been helped by the recent strength of the UK corporate M&A market. Early indications suggest firms’ performance during the first half of the 2018–2019 financial year has remained strong.

“However, there is more uncertainty during the remainder of this current financial year. This uncertainty is being prompted by a variety of factors, including imminent Brexit deadlines, strains in emerging markets, and the perception that potential UK takeover targets are now fully valued.”

The report said one “important development” was the “increasing competition for clients and lawyers between a select group of US firms and UK firms”.

High-profile lateral moves from UK to US firms “has caused pressure on traditional lockstep compensation systems in the UK firms, as well as pressure on associate salaries”.

In the alternative legal services space, it noted, there has been “considerable activity”, with two more listed law firms taking the total to five, as well as continued growth for the accountancy-linked law firms and of the number of conventional law firms setting up low-cost support centres.

A survey conducted among law firm leaders from across the world singled out New York as the location offering the “strongest opportunity” over the next two years, followed by London – “although many cite the challenges of attracting talent and work in these two highly competitive markets. With regards to London, there remain concerns regarding the impact of Brexit”.

The report predicted that in a market where competition was likely to remain fierce, pricing pressure would continue and costs were likely to rise, “firms are likely to make changes to their business model to focus on growth and efficiency”.

It said: “In addition to investing more in the practices that they are best known for, and that deliver the greatest profits, they tell us that they are addressing underperforming practices and offices. Driven to become more efficient, they tell us that they will introduce more alternatives to traditional leverage and look to use more technology (especially artificial intelligence).

“Above all else, many have told us that the biggest changes to their business models will be a shift in how they approach the delivery of legal services based even more from the mindset of the client, solving their complex business issues within defined budgets, using alternative pricing, project management and emerging technologies.”

Law firm leaders told researchers that the shift towards alternative fee arrangements (AFAs) was growing at a faster pace than they had previously anticipated, and they said AFAs would probably account for nearly 20% of their revenues in 2018, a figure masking firms trying to avoid AFAs and others embracing them.

However, a majority of respondents “have not yet seen them have a positive impact, either in terms of realisation or margins”, the survey said.

“For those who reported AFAs as improving profitability, several reasons were noted – including that they could now beat hourly rates where proper scoping, staffing, pricing and reporting work was undertaken.

“Some respondents also stated a belief that usage of AFAs could lead to the firm attracting more work, because clients liked the transparency and predictability that AFAs bring to the relationship.”

Respondents were more optimistic about the profitability of AFAs by 2020, saying that a greater experience of using them would ultimately yield better outcomes. “Secondly, greater usage of AFAs would allow the effects of specific bad outcomes to be diluted.”

The report added: “One possible reason why take-up of AFAs is not higher is that, while many clients initially ask for work to be undertaken on an AFA basis, they ultimately request a discounted hourly rate instead.

“This is an outcome which law firms tell us occurs on a regular basis. AFAs, it seems, are not always as popular among clients as discussions in the legal press and conference circuit suggest they might be.

“Ultimately, many clients simply want firms to deliver legal services at a lower cost than before.”

Citibank said it had been a strong growth year for US firms, with revenues among those surveyed grew by an average of 6.3% during the first nine months of 2018, and it expected similar top-line growth in 2019.

Meanwhile, Deloitte’s quarterly legal sector survey revealed yesterday that the UK’s top 100 law firms achieved an average fee income increase of 9.7% in the quarter ended 31 October 2018, compared with the same period last year. This led to an overall increase in fees of 10.6% in the first half of the financial year.

“The increase in the quarter was driven primarily by a combination of growth in fees per fee earner of 5.3% and growth in fee earner headcount of 4.5%. Chargeable hours per fee earner increased for each of the size categories with improvements of between 1.4% and 2.4%.”

Jeremy Black, professional services partner at Deloitte, said: “Overall, this half-year has been a very successful one for the sector. The strength of the transaction and IPO markets over the last six months has obviously been a major factor in this growth.

“However, while the overall results were very strong, performance of individual firms varied considerably depending on their areas of work and geographical footprint.”

The survey also found that participants expect slower growth in the third quarter, with fee income forecast to increase by 6.9%, with Brexit uncertainty a concern.

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