Why law firms can’t rest on their laurels

Our latest Legal Benchmark Report carries a clear message on its front cover: law firms need to avoid complacency.

That message is key for 2016, as the legal sector adjusts to what we refer to as “the new, post-recession norm.”

So how did we get to this “new norm”?  The answer is it’s been via a route involving significant shake-ups.

Prior to the global financial crisis, legal firms in the UK were charging their lawyers out at unprecedented rates, with highly qualified professionals carrying out relatively low-level work.

That’s all changed. Recession brought with it the challenges also faced by myriad other industries and sectors and it arguably wasn’t until 2014 that the UK was able to enjoy sustained economic performance.

That year signaled the release of pent-up demand, with the booming housing market leading to an increase in conveyancing and corporate confidence delivering additional business.

And this more stable environment rolled on into 2015, with corresponding increases in fee income and profit per equity partner.

But fast forward to 2016 and, as our Legal Benchmark Report outlines, many firms appear to be struggling to deliver growth levels achieved in the previous two years.

Delegates at our local autumn 2015 conferences signalled this too, indicating that while generally there’s a positive mood, there’s also less confidence in firms’ ability to grow revenue and profits.

So while the last couple of years have seen firms restore balance sheets that had been hit by the recession, we’ve now moved into a phase where the focus needs to be on what happens next.

This has also come about partly because more lawyers are now competing for work and, in contrast to the pre-recession days, this is a time where providing cost-effective legal services to clients is key.

Therefore, with profitability being squeezed, the avoidance of complacency and actively looking to move forward into the future is now all important for law firms.

How can this be done if profits can’t necessarily be boosted simply through extra work? The answer is one which applies to more than just the legal sector – efficiency.

A fundamental way in which law firms can become more efficient is through their use of technology. The fourth biggest cost for firms, after people, premises and insurance, is IT. And in a NatWest survey conducted in September last year, respondents attributed 7.55% of their costs to spending on technology – which equates to tens of millions of pounds for some of the higher-earning firms.

Despite the cost, a massive 96% of the leading UK law firms we questioned also said they saw IT systems as a source of competitive advantage in the legal profession. Given this importance, companies must ensure they get the best from their technology.

One of the best ways it can be done is by looking at how IT is financed and managed. Lombard, NatWest’s asset finance arm, is taking a leading role in this through its Lombard Technology Services (LTS) division.

LTS provides finance for a wide range of assets, from software to servers and tablets to telephony systems, which can mean that firms can release cash to invest in other areas. It also enables firms to match the funding cycle to the useful lives of the assets.

But efficiency can also be gained beyond the simple financing of assets, with support available throughout the lifecycle of a product. This includes the sourcing, installation, maintenance and disposal of assets so that technology inventories are as efficient as possible. The associated upgrading and updating of systems also offers improved security against cyber-attacks, which many in the legal sector view as a significant future risk.

Elsewhere, there’s also been plenty of talk about the role of artificial intelligence (AI) in the legal profession.

While this might conjure up images of robots in courtrooms, the potential reality isn’t quite that far-fetched. Yet it has the potential to bring efficiencies to many of the tasks which take place in the legal world and in professional services as a whole.

These industries rely on data, information, records and analysis. And while AI is unlikely to see massive reductions in headcount in the near future, it’s predicted that it could transform the way legal services are undertaken.

Irrespective of whether that happens sooner, later or at all, it remains vital for firms to ensure that technology investment supports their business strategy and happens in the most cash-flow and tax-efficient way.

Beyond technology, there are of course other ways in which efficiencies can be achieved, one of which is via mergers. Today’s environment of relative stability, combined with the older owners of legal firms wishing to retire, does lay a platform for merger activity.

And with mergers come efficiencies. Fewer offices, fewer partners and less admin are clearly by-products of two firms becoming one, leading to better economies of scale and increased profitability.

What this all boils down to is that the legal sector isn’t standing still – and adapting to change needs to happen if firms are to achieve success.

That’s why we’ve got such a clear message on our latest Legal Benchmarking Report, which in itself is the largest one to date, covering 390 firms and focusing on those operating within the SME sector. Contributions are up by 15%, while we’ve also incorporated data showing changes across critical business indicators over the last four years.

The report looks at areas including fees, profit, lock-up and finance, while an additional element looks at how legal firms perform compared to accountancy firms.

It’s an interesting and detailed picture of the legal sector – a sector that’s generally in good health but can’t ignore the challenges that this and future years are likely to bring.