Four focus areas for law firms to grow their revenues, margins and resilience in the coming five years

12 February 2019

In my first blog, Taking stock of the past five years”, I examined the factors that have been squeezing firms’ profit margins, and explained why resilience has become so vital over the past five years. Similarly inspired by PwC’s latest Law Firms’ Survey, my second instalment maps out the steps that law firms need to take if they’re to remain resilient for the next five years.

I ended the first blog by saying the priority for every firm should be to invest in smart ways that create a platform for profitable growth. This will mean loosening the purse-strings and finding money to invest. But where should the investment be targeted to have the greatest effect? In my view, the answer can be found in four key areas.

First, making the operating model more efficient. This has two parts. One is using the right grade of lawyer for the right work. The other is striking the right balance between fee-earning staff and support staff. Get this balance wrong, and you’ll either have expensive lawyers doing routine admin, or support staff sitting around doing very little.

For many firms, a further challenge around their operating model is a “bulge” in solicitor staffing above five-year Post-Qualified Experience level. Our study shows that about half of fee-earning staff from newly qualified upwards (excluding partners) are in this grade.

This bulge has two effects: senior lawyers are probably doing work that junior staff could do, impacting margins; and the talent below them are looking up at a thick glass ceiling, possibly prompting them to look elsewhere.

Some firms are making good progress in redressing this imbalance - but others have hardly started. And the solution isn’t necessarily to slash headcount: far more productive approaches might include providing opportunities to reskill or transfer between different areas of the firm. Law firms often find their lawyers are much more adaptable than they’d previously assumed.

Alongside the operating model, it’s also vital to invest in IT systems: first to get the basic foundations right, and then to capitalise on new and emerging technology to deliver quality services more efficiently. In particular, law firms’ use of data analytics and artificial intelligence (AI) will continue to grow over the coming five years, and firms that fail to invest in these technologies will risk getting left behind.

But what will they be used for? To be clear, AI will not in the foreseeable be able to give complex, nuanced, high-quality legal advice of the type an experienced human professional can provide. But research has shown consistently that AI engines can carry out some legal processes faster and more accurately than any human. Plus AI doesn’t get tired: it’s as effective and alert at midnight as at midday.

Clearly, these attributes don’t just apply in legal services. But in areas like discovery and contract reviews, AI has huge potential – and firms ignore it at their peril.

Another aspect firms must get right is staff remuneration - ensuring that rewards incentivise behaviour that’s productive not just for the individual, but the firm. Basing bonuses on fees charged is counterproductive if those fees are not profitable – so bonuses should be performance-based, reflecting value generated.

The fourth and final focus area is working capital. The law firm sector has a very poor track record of locking-up cash in work-in-progress and debtors, yet – if released – this is the cheapest source of finance. Improving lock-up by 15 to 20 days could free up millions of pounds for investment across the business.

In my view, targeting the four areas I’ve highlighted will be key to law firms’ resilience in the next five years. But what are the biggest threats to that resilience? Our study pinpoints four:

  • Shortage of talent – spotting, recruiting, rewarding, developing and retaining the right people. One area firms often overlook is ensuring their people are aware of the full package of benefits they receive, not just base salary.
  • Technology – investing in IT on an ongoing basis will become part of the norm: as technology advances, firms’ IT will need to keep pace.
  • Cyber threats – ensuring systems are technically secure while also conducting training and scenario-based crisis response exercises to build readiness to deal with breaches.
  • Brexit – remain resilient and agile to ride out whatever challenges and opportunities Brexit throws up.

In fact, resilience and agility will be vital qualities across everything law firms do throughout the next five years and beyond. It’s these attributes that will mark out the industry’s winners. Now’s the time to invest in building them.

Leon Hutchinson | Senior Manager
Profile | Email | +44(0)7739 449052

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