Law firms look ahead to the future
06 November 2019
Each year, PwC’s Law Firms’ Survey gives us a fascinating look into the performance of the UK legal sector. In an economically turbulent year, firms showed much resilience and still reported revenue and profit growth.
The survey is also an interesting predictor of how the sector will perform in the future. And this is where we focus in this blog.
The accuracy with which law firms forecast future finances has varied greatly over the years. This year was no different: predicted fee income levels were generally achieved, but profit was not. Despite this, firms remain optimistic about the future.
Recognising economic uncertainties, most firms are less optimistic about the short term. They do, however, expect modest fee income growth, albeit with profit improvement lagging.
In the longer term, forecasts are more optimistic. The Top 50 firms, for instance, are looking at profit growth outstripping fee income growth in 2020/21.
Although, these predictions come with a warning. Historically, firms have been inconsistent in meeting long-term targets and are often too bold in their forecasting. While ambitious targets may motivate, balance is needed between ambition and realism. So, long-term optimism should be considered cautiously.
We also need to acknowledge that the medium-term financial performance of law firms will be impacted by how the economy responds to Brexit; and the extent of this remains very difficult to predict.
An increase in deals?
A number of firms are expecting - or looking - to merge. More than a third of Top 11-25 firms are looking at potential merger activity, and half of the Top 10 expect a combination or acquisition within two years.
Many are looking to merge with non-UK based firms to grow their international prowess. It is hardly surprising given the rewards being reaped by the firms that have previously invested in international offices. Even outside the Top 25, firms are looking to diversify operations, geographic reach and services through mergers or acquisitions.
We expect the largest UK firms to merge with US firms and tap into the lucrative US market, attracted by the huge differences in financial performance. Our survey highlighted the widening performance gap between UK and US top tier firms (net profit margin: UK 36.5%, US 45.7%, or £152m profit difference).
Mid-tier firms, however, are more likely to merge with smaller UK organisations or increase finances through IPO or private equity investments.
The type of mergers we will see over the next two years will be wholly dependent on a firm’s individual goal - whether that’s to expand, consolidate or survive.
Threats to firms’ ambitions
Outside the Top 10, the major challenge to financial performance was Brexit. Perversely, because of the difficulty of prediction, a number of firms have ignored Brexit in financial forecasts. It will be interesting to see what impact this has on firms meeting their targets next year. In contrast, the Top 10 firms’ key focus was technological change over the next 2-3 years.
Testing times ahead, but optimism remains
This year’s Law Firms’ Survey suggests that tough times may lay ahead, but optimism remains. Those firms that can be agile and bold - in responding to challenges through an effective strategy - will likely be the industry’s success stories.