PwC’s 2017 Law Firms’ Survey predicts further M&A activity and technology-driven change
October 17, 2017
Our latest Annual Law Firms’ Survey provides some interesting insights into the performance of the UK's top 100 law firms. While overall revenue has grown, profit margins are under pressure with almost half of all firms surveyed experiencing a drop in profits in the last year.
As client expectations grow, the adoption of technology is widely expected to transform the delivery of legal services. Our survey shows that 80% of Top 10 firms and 57% of Top 11-25 are either piloting or establishing more commonplace Artificial Intelligence solutions and among the Top 11-50 firms, Robot Process Automation is being looked at or adopted. However, most law firms continue to focus on IT for the back office and the digital revolution has not yet truly begun in the front office.
From an investment perspective, technological change in legal services will have a number of implications, including:
- Transforming to a technology-enabled professional services firm requires substantial investment. Law firms are taking on more external funding, increasing to 20% of all funding for the first time since our survey began. Some firms are retaining more profit for investment – top 10 firms, for example, have reduced the amount paid out in the year in which the profit is made from 60% in 2016 to 55% in 2017. In future, we may see more fundamental changes including public listings and alternative sources of investment.
- The liberalisation of the legal market has brought in many new entrants and as long as law firms move slowly, there is scope for these alternative legal service providers to reach scale. Most law firms have begun to recognise the challenge – over half of Top 25 law firms are ‘somewhat concerned’ about new entrants.
- Growth of legal tech companies – law firms will increasingly adopt or replicate the solutions being developed by technology start-ups for their sector as they look to develop ‘best in class’ approaches as compared with those being developed in-house. Collaboration between lawyers and technologists from start-ups is also likely to increase, with 2017 including a number of high-profile examples of such initiatives.
Against this backdrop of technological change and the emergence of new entrants, we expect continued consolidation of law firms. Indeed, over half of the Top 11-25 law firms expect to undertake mergers and acquisition (M&A) activity in the near future, with most looking to overseas markets for targets. As technology changes the scope of client relationships, firms will race to emerge as global winners in a new order. In my next blog I will investigate the future of the law firm.
If you’d like to discuss any issues I’ve covered here, do get in touch.