The global law sector is facing a time of transition. Traditional bricks-and-mortar firms are struggling to cope with an incoming wave of alternative business models, and top fee-earners are either sinking or swimming based upon their ability to embrace technological advances in the field. Meanwhile, demand for law services isn’t expanding as quickly as supply in many international markets.
Yet despite these vigorous challenges, 2014 was a stellar year for the global law sector. Profits per all partners at the UK’s top 10 firms shot up from £840,000 ($1.32m) to £925,000 ($1.45m). The net profit margin of US top tier firms hit a whopping 47 percent, and chargeable hours went up across all international regions.
While many smaller firms have crumbled under the weight of big-name paralegal débutantes, the industry’s undeniable successes in 2014 was achieved by those dynamic firms that addressed the key issues facing the industry head-on. Firms are finally capturing a degree of scale through consolidation, and they are embracing new, cutting-edge IT systems that are revolutionising an industry that has largely gone unchanged for two centuries. If the sector continues to respond favourably to such changes, it will continue to be a hugely exciting time for the global law industry.
Supply and demand
Throughout the course of 2013, research by Legal Week found that the globe’s top 50 law firms saw their average profits shrink by 0.5 percent – while turnovers rose by nearly seven percent. By and large, that’s because firms have been finding it difficult to manage their costs within the fee structures clients have come to demand. As a result, many mid-size firms have been forced to pursue aggressive restructuring strategies that have seen dozens of support roles eliminated.
In 2014, the industry appeared to have turned a corner – and those reactionary restructuring exercises have somewhat paid off. In the next year, The Law Society estimates UK legal services in particular will have powered out of the global recession posting an annual growth rate of 4.2 percent. Much of the industry’s triumph stems from the ability of UK firms to win an increasing share of the global market. With strategic international expansion and domestic regulatory changes permitting a major rise in external investments, analysts reckon many UK firms are well placed to win an even larger share of business in 2015.
Against all odds, global firms (and particularly US firms) have also seen business pick up considerably as a result of the now receding global recession. Because of the intensive financial constraints and activity restrictions being placed upon international businesses, in-house legal teams have taken a major beating. General counsel have been forced to shed jobs left, right and centre – opening up the door for professional law firms to take on contractual work that companies no longer have the time or resources to complete. What’s more, increasing regulation and compliance oversight surrounding life-or-death facilities like financial reporting, has meant European firms need more legal advice than ever before. As previously stated, many law firms are consequently experiencing a rise in demand for more affordable services. Yet with 60 percent of global firms preparing to increase their chargeable hours in the next 12 months, according to a recent RBS survey, that means firms have had to track down savings elsewhere so as to avoid cutting into their bottom lines.
One way that firms have successfully trimmed costs in 2014 is by developing a lower and more variable cost base aligned to the activity levels of various clients. Yet by and large, global firms have mostly been able to drive profitability through an increased reliance on paralegals. So-called ‘non-solicitor lawyers’ are taking on more work than ever before – and over the course of the last year their role in the sector has continued to evolve. Paralegal firms cost less, and the typical billing rates prove an invaluable savings against the valuable time of costly fee earners. In 2015 30 percent of firms are anticipating to see an increase in their reliance upon paralegals.
In cases where more stringent legal credentials are required, European firms have begun subcontracting an unprecedented amount of work to regional bases. Legal process outsourcing (LPO) companies have also exploded across Southeast Asia, and have earned a sterling reputation over the last couple of years for their ability to take on commoditised matters more efficiently than many domestic firms because of their highly systemised (and often automated) frameworks.
Last year, the value of the LPO sector hit an all-time high at $2.4bn. Yet research by the London School of Economics is forecasting that worth to increase steadily over the coming months, with the industry’s biggest players predicted to expand into higher-value work in 2015. Top city firms » have also gone on to establish process units in cheaper sites across the UK and Europe to tackle less important aspects of business, such as immigration services. In turn, that has left firm bases and top fee-earners a chance to take on bigger clients utilising a whole new range of affordable umbrella services.
A new generation
One strategic modification the sector did benefit from in 2014 was a shift in the number of lateral hires taking place. For too long, firms were staking much of their financial success upon bringing in experienced fee-earners in a desperate bid to increase overall corporate value. Yet in reality, it usually takes between 18-24 months before lateral hires are able to generate any sort of noticeable cash flow. It’s been estimated that around a fifth of those hires don’t make it past their first two years at any given firm; therefore, the sector has finally begun to realise that lateral hires are an increasingly risky basis for domestic growth.
Value of the LPO sector, 2014
At the end of 2014, just a third of law firms surveyed said they anticipated the number of lateral hires to increase in 2015. Top talent is being retained relatively easily, with the majority of firms protecting chargeable hours and fees from taking any sort of hits as a result of industrial constraints. Meanwhile, firms are investing more than ever in traineeships in order to foster young talent and capitalise on a degree of corporate allegiance. In 2014, a vast majority of those opportunities were created at international partner firms and regional bases in a bid to cater to brash young hires keen on habitual changes of scenery. In order to make those traineeship programmes bear fruit, global firms have become utterly reliant upon establishing new relationships.
In recent times, dozens of non-sector firms have taken their first sorties into the global law sector. Using alternative business models, insurance giants, popular TV loan companies and even high-street banks have introduced a range of new legal services to compete with old-fashioned, brick-and-mortar law firms. Some smaller firms are experiencing huge losses in ordinarily reliable revenue streams like conveyancing services as a result. But other law firms have responded in kind by finally choosing to invest in infrastructural upgrades capable of competing with those alternative models. Particular emphasis is being placed on information technology. A 2013 survey by PwC stressed an “urgent need” for the top 10 UK law firms to innovate their IT infrastructure. This year, 80 percent of firms across the globe have answered the call, pressing for technology upgrades that are already making a huge impact on corporate efficiency. For the first time ever, major firms are prioritising infrastructure upgrades that ensure all staff have secure access to case-critical information outside company premises. New metadata technology is providing firms with higher predictability on costs, which means they have a more controlled grip on outgoing expenditures. As cultural shifts continue to press demand for IT-savvy services, law firms are finally battling to stay relevant. That’s bringing in more business, and it’s also cutting costs.
Overall, the global law sector has enjoyed an uncharacteristically profitable 12 months, and so it is the perfect time to praise the high achievers in our Legal Awards. Average profit per equity partner shot up by 10 percent, and new industrial upstarts posted revenue growth in excess of 84 percent. In turn, older institutions are finally embracing change. They’re investing in new talent rather than fickle veterans, and capitalising on outsourcing capabilities that have the ability to drastically cut costs. So long as the sector learns from its successes in 2014, and law firms don’t revert to the frustratingly self-indulgent business practices that pre-date the recession, there’s no reason growth shouldn’t be even greater in 2015.