Away from the top-100 behemoths that gobble up the headline-grabbing instructions, as well as each other, the small and medium law firms (SMLF) are the engine that powers the industry. In the UK, 97 per cent of all law firms employ between 1 and 50 fee earners, according to the Law Society. They account for 52 per cent of all lawyers and for 25.5 per cent of total billing – that’s £6.4bn annually ($9.4bn).
Check out our infographic on small and medium law firms
Thomson Reuters conducted in-depth research with more than 400 respondents at law firms with between 1 and 50 fee-earners. The results paint a picture of a segment facing challenges and opportunities in equal measure, with technology having a profound impact on who wins – and who loses.
Strong demand is driving top-line growth – headline figures are positive…
The good news is that growth exists in the SMLF world. The list of serious challenges to SMLF will be familiar to any practitioner, in particular winning new clients, maintaining profitability and managing cash flow. However, more than two thirds of firms surveyed have experienced either steady or rapid growth over the past 12 months. In its 2016 Law Firm Benchmarking Report, Natwest reported median profit per equity partner 4 per cent higher than 2015, as well as a 6 per cent rise in fees. Our survey’s respondents supported this: some reported doubling salaries, tripling headcounts, and turnover almost doubling inside a decade. Many interviewees put that down to market-driven factors, such as the general recovery of the economy. ‘We have a long untapped pipeline of work,’ one respondent reported. ‘It feels like we’ve been gearing ourselves up to act on large amounts of work that is just sitting there,’ said another.
… but lawyers are having to work harder to deliver
Despite this growth, there is a consensus that the market is tough, and getting tougher. ‘While we’ve been growing topline, we’ve been pedalling much harder,’ said one lawyer from a mid-sized firm, echoing the thoughts of many others. Meanwhile, the gap between those firms succeeding and those facing challenges is growing. One measure of profitability is revenue per fee earner – on average, firms performing well against this metric are generating 77 per cent more in fees per fee earner than those in the bottom quartile. This disparity has grown over the past 12 months: without a clear focus on fee earner profitability, firms could face an uncertain future.
SMLF face increasing client and competitive pressures …
Across the board, clients are more demanding on service levels and fees, forcing firms into hard choices. ‘Our clients want more personal service and more output,’ said one respondent. If firms need to work harder to sustain growth, are they focusing their efforts in the right places? Can they afford to pull fee-earners from non-fee-earning work? Could an investment in technology, or in the recruitment of professional managers, be the answer? Professionalising customer service and business development is a popular goal for SMLF, as well as recruitment, and the lingering temptation of a merger. ‘The sector is consolidating,’ one respondent told us. ‘We need to keep pace with others, deliver growth for our staff and enable investment in new platforms.’
‘While we’ve been growing topline, we’ve been pedalling much harder’
The old, familiar solutions have survived for a reason, and many lawyers in this space expect to maintain growth into the medium- and long-term by doing more of the same. But in a market in which everyone is pedalling harder, is this sustainable? Given the concern around serving matters and clients profitably, should law firms be looking at the processes that govern how work is handled, in addition to the volume? As one respondent made clear, ‘we’ve got more than enough work. The key challenge is dealing with administration of work, and not spreading my time too thinly.’
… but how a firm grows is just as important as how much it grows
The focus is increasingly on how work gets done, and how quickly. This is indicative of a wider recognition that a more business-oriented outlook to legal service delivery is key to the sustainable growth that law firms crave. The widespread adoption of specialist practice management software is a clear sign of this, with the likelihood of adoption increasing alongside a firm’s headcount. A focus on profitability and cash flow as two of the top priorities for firms in this space demonstrates a shift in attitude, where one-time innovations like fixed fees, flexible working and outsourced professional accounting are now just part of the toolkit. How a firm grows is just as important as the growth figure itself: behind the headline growth in fees of 6 per cent, recovered rates have grown 8 per cent, as firms strive to reduce the amount of time written off and provide another boost to profitability.
Technology is a key enabler, and a vital part of strategy …
From the solo practitioner up to the firm with a headcount of 50 fee-earners, a critical mass of more than 75 per cent now know that technology is a key enabler, and a vital part of their strategy. ‘Manual methods are too time-consuming,’ said one. ‘We really want to free up time to focus on our clients.’ The smart firms realise that those not constantly looking at how they can better utilise technology will be left behind. Some are even stitching together best-of-breed components to build customised solutions for their clients. Tellingly, the percentage of firms and solo practitioners surveyed who neither feel that they need new technology, nor see what it can do for them, hovers at roughly zero.
… and SMLF are widely adopting specialist practice management software
Sixty-seven per cent of firms surveyed are using specialist practice management (PM) software. Improved internal efficiency is the top benefit of adoption, as it enables them to ‘free up people from admin,’ and focus on the client service that will drive growth. Those who don’t feel the need to invest in PM tools are falling back on low-tech workarounds like Microsoft Office, or loading admin onto secretaries. Their reasons for failing to invest usually stem from a feeling that their current processes are sufficient, and the benefits of adoption aren’t compelling enough to take the plunge. Compounding this is the lack of an obvious PM option that can perform all key tasks adequately – and around half of PM users would be willing to switch. ‘Nothing has addressed all our needs or had the right user interface,’ said one respondent. ‘What’s out there now isn’t good enough to justify the effort and the time costs of switching … the market just can’t do it all at the moment.’
Challenges and opportunities
Reflecting on the results as a whole, it’s clear that while things are going reasonably well for small and medium law firms, they probably won’t go well forever. Firms need to take a long, hard look at how they operate, their use of technology and the way they complete work in order to remain successful in an ever more competitive environment.
