Has the LLP had its day?
1 @SmithWilliamson
Smith & Williamson
1 Contents
Executive summary 3 The changing competitive landscape 5 Changing business structures 11
Continuity and change 17 The continued dominance 21 of legal technology Is lock-up coming down at last? 25 Brexit 29
2 Executive summary
In this, our twenty-fifth annual law firm survey, we have sought the opinions of over 130 senior executives at law firms from the UK to understand current levels of business confidence in an increasingly challenging global economy. Our barometer of the concerns and opportunities seen by senior industry figures has been running since 1994, providing insights into long-term trends. The clear messages coming out of this year’s survey are that retention of top talent in an increasingly competitive market is a priority, while law firms also recognise the need to invest in technology to keep pace with the competition and to fend off cyber-attacks.
Confidence and years with 52% of respondents next generation of legal project competition selecting this as one of their managers while in December top three concerns. The legal Norton Rose Fulbright launched a Confidence across the legal market press continues to be awash with graduate scheme focussing on legal is a key factor we have measured stories of high-profile moves operations. These two initiatives since our first publication. It of both individuals and entire show a significant shift over the last has tracked both the highs teams as firms vie for position 25 years where these roles would and lows of the legal sector, in jurisdictions and product not have existed and firms would alongside domestic and global specialisms across the globe. not have considered employing economic trends. It has provided In 1994, when we started running non-graduates. a startlingly accurate insight into the law firm survey, movement of the business cycle for legal firms. partners between firms was the Corporate structures and This year, confidence has taken exception rather than the rule strategies for growth and trainees often built a lifelong a significant dip from last year’s For the first time, the survey career at their firm. all-time high with the US-China asked about corporate structures trade wars, tensions in the Gulf, Today, stories run on almost a and whether the Limited Liability the ongoing Brexit saga and weekly basis, highlighting the Partnership (LLP) model still signs of a weakening global and tensions between the traditional best served the needs of the domestic economy all taking their UK firms and those US firms business. There is a clear view toll on the levels of optimism seeking to strengthen their throughout the legal sector that across the industry. Running position in the UK market. New being a pure LLP is not necessarily alongside this dip in confidence law companies and the Big 4 the best structure to take these is the continued expectation of accountants are also posing a organisations forward. This is a competitive pressures, both from challenge to the traditional law strong sign of just how much and familiar quarters and, increasingly, firm model by offering a greater how rapidly the legal sector has from the perceived threat of level of flexibility in working been changing over the last three international firms cited to have patterns. Key examples of this to five years. superseded that of niche firms. are the continuing success of Although mergers and acquisitions The 'Big 4' accountants are also PeerPoint or Vario. starting to make their mark. continue to play their part in the As reported last year, the number of reshaping of the industry, there The war for talent non-legal roles continues to grow. are an increasing number of firms floating on the stock exchange to Retaining the right people is In June, Clifford Chance announced become a Public Limited Company reported as the number one an A-level apprenticeship (PLC). However, many firms have concern for the next three training scheme to build their not taken this big step, possibly
3 Giles Murphy Head of Professional Practices +44 (0)20 7131 4369 [email protected]
because they do not see a need to deliver broad benefits to both the strategy in this area, lock-up will do so or they are uncertain about firm and its clients. remain the same and quite possibly what model would work for them worsen at a time when uncertainty and therefore the risk is considered In the last three years, much has should encourage law firms to build too great. been written about AI. Initially it strong cash reserves. was heralded as the next great However, we have seen a growing revolution, but then there were Brexit’s final act? number of off-shoots and law firms questions about whether it was all The almost 53:47 division as expanding into other services. hype and just another buzzword. to whether Brexit will offer up Twenty five years ago, law firms Time has shown that it is not hype opportunities or create increased stuck to the practice of law. but AI cannot be considered in threats to business is similar to last Today, some are expanding into isolation. It is a composite part of year’s survey; a continued division consultancy based services. a broader solution and is beginning of opinion that closely mirrors the to deliver results for the firms that referendum of three years ago. Any Legal technology have invested and persisted. speculation in this report on the Investments in technology continue Still, still not getting the outcome of Brexit would be folly to dominate both law firm budgets as it is published only weeks before and their strategic direction. The message on lock-up the latest deadline of 31st October. focus is on improved efficiency and In each of the past 25 years firms We will leave our detailed analysis client integration through greater have said they will improve lock- on that topic to next year. transparency and collaboration. up and every year the figures only show a marginal change. This year Our report shows that the simplified is no exception, with 36% of survey approach of defining technology respondents saying that improved investment by an individual term lock-up will be the key source of – collaboration, pricing strategy, increased funding over the next 12 automation – does not do justice months and 79% expecting a slight or to the complexity of the solutions significant improvement in lock-up being put in place. Improved pricing over the next 12 months. analysis comes out of implementing AI solutions across large data sets, For some, these hopes may not which in turn deliver efficiency be unfounded if they are making gains through improved resource significant inroads into their management, and greater billing pricing analysis, time recording transparency to clients – multiple and billing solutions. However, for technologies coming together to those who don’t employ a new
4 The changing competitive landscape
5 1 1 6 The competitive landscape Are law firms beginning to feel the competitive pressures in an increasingly challenging market?
Looking back over the last few years, the data shows a shift in the perception of competitive pressures within the legal sector. Last year, 26% of firms felt there was little or no change in the competitive landscape. In 2019, declining confidence has seen this figure erode to just 15%. Conversely, the number of firms experiencing a slight or significant increase in the competitive landscape has risen by 10 points to 84% this year.
How do you think the level of competitive pressure in the legal profession has changed over the last year? respondents citing this as their top competitive threat. The impact of international firms has jumped four places to become the second most 51% 33% 15% 1% common concern. Firms may be 2019 looking to Europe and the potential lift in work from the (eventual) conclusion of the Brexit story. 51% 23% 26% While the issues that Brexit will 2018 raise in the short to medium term will not deeply affect firms in the Slightly increased Significantly increased top 50, due to their international reach, the smaller UK outfits may Little or no change Slightly decreased well be right to be concerned by the outcome.
The Big 4 accounting firms Although all regions generally Russia and the West all adding to a and the other legal companies reported an increase in competitive tougher trading environment. have also moved up the table, pressure, respondents in London While law firms are not able indicating that 12 months on, law appear to be feeling this more firms are finally realising that keenly than other regions. to control these factors, they can mitigate other competitive this threat is here to stay and 94% of London respondents said threats. However, new entrants to this group is beginning to make they felt increased competitive the legal market, competition for serious inroads into their market. pressure compared to an average talent and rising salaries remain However, while there is no doubt of 76% across all other regions. key challenges. that the Big 4 and new legal This correlates with other research companies are making an impact, Who do you anticipate it appears that large law firms are that shows the growing threat of being the main sources US law firms in the City. reacting to this competitive threat of competition? by creating their own alternative There are many reasons for these When rating these sources of services. Firms are continuing to changes over what has been a competition in order of priority, make investments in technology turbulent 12 months, with a myriad the trends reported last year are to help streamline legal service of geopolitical issues, including the little changed 12 months on. A delivery, creating or acquiring ongoing Brexit saga, US–China trade firm’s current direct competitors low cost service centres to offer wars, growing unrest in the Gulf continue to be the overwhelming certain types of legal work at as well as the tensions between source of concern, with 74% of more competitive rates and, most
7 What do you anticipate as the main sources of competition for your firm over the next three years?
Current direct competitors
International firms
Niche firms
Online service providers
The Big 4 accountancy firms
In-house resources within client organisations
Other accountancy firms obtaining licenses to practice law
0% 10% 20% 30% 40% 50% 60% 70% 80% 1st choice 2nd choice recently, starting to create entirely new non-legal services.
Notably, Dentons has set up a risk consulting business that will operate as an independent LLP under the Dentons name while Norton Rose Fulbright has created a new legal operations consulting practice to add to its technology consulting practice and its global payments practice. As with the accountancy firms in the 1990s, large law firms are now looking to consultancy services as an extension of their core business.
Furthermore, in June Eversheds- Sutherland announced that it would be launching a new business built on its existing consulting platform to go head-to-head with law firms and the 'Big 4' accountants dealing in contract lawyers, managed legal services and consulting markets.
Konexo, as the new business is called, will have a structure that will enable it to attract external investment, consider joint ventures and acquisition opportunities to support and accelerate its growth. Eversheds-Sutherland will also consider the potential to float Konexo in the next few years if it proves to be as successful as hoped.
8 8 In-house teams continue to pose Looking beyond issues of talent Although differentiation has always a second-choice concern for many management, the survey results been on the minds of firms, it looks respondents (23%), indicating a show that the challenges reported like it is beginning to take on a new strengthening of these teams to last year persist today. This raises level of concern. This is, in part, reduce costs. These activities are the question of what, if anything, due to the rise in the competition more likely to affect smaller firms firms are doing to alleviate these for delivering legal services but that undertake more of the routine pressures. Admittedly, improving also as a result of the emerging work for these companies. efficiency (a top concern for 35%) trend to diversify away from legal may not happen overnight but services into consulting services. Talent management when this issue is rated in the The evolution of the traditional and 20 years of top four, year after year, it brings law firm has never looked quite so salary data into question the efficacy of the dynamic and it will be interesting strategies put in place or, alarmingly, to see how many firms will follow The legal press continues to be whether firms really have the this diversified path over the next full of stories about attracting and appetite to address and resolve few years. retaining talent, lateral hires and this issue. In a world of increasing the movement of teams from one competition and hardening economic firm to another. The responses to factors, many of these concerns the survey show continued anxiety need to be addressed not only to around managing talent with further meet the competitive challenges pressure from the growth of the but also to create room for firms to competition across the legal sector. focus on other issues raised in this Research on salaries over the last evolving sector. 20 years carried out by The Lawyer shows the salary gap between the Hogan Lovells salaries since 1998 biggest firms and the mid-tier to £100,000 be wider than ever before. Twenty £90,000 years ago virtually all firms paid their newly-qualified lawyers the £80,000 same; today this gap can be as £70,000 wide as £23,000. Taking Hogan £60,000 Lovells as an example, this graph shows the recent acceleration in £50,000 pay for newly-qualified lawyers £40,000 compared to trainees. £30,000 £20,000 £10,000 £0
98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19
First year trainee Second year trainee NQ
Which of the following do you consider the biggest challenges for your firm over the next two to three years?
Retaining the right talent Adopting new technologies Improving efficiency Attracting the right talent Pressure on fees Differentiating my firm from competitors Managing succession New forms of competition Changing client requirements
0% 10% 20% 30% 40% 50% 60% 9 1st choice 2nd choice 3rd choice Business outlook
Perhaps as a result of the jitters from last year’s high. Only 87% similar pattern to 2007 and into created by increased competitive of respondents reported feeling 2008. This is not to say that our pressures from new entrants into reasonably or very confident about survey is predicting a financial the legal sector, the increasingly the business outlook. crash on the scale of 2008, but uncertain political outlook and Looking at the barometer of it does suggest the early warning the early warning signs of a business confidence below, the signs in the markets are beginning global recession, the level of declining confidence reported to be reflected in levels of business confidence for the year this year appears to be tracing a business confidence. ahead has taken a significant dip Looking at the year ahead, how confident are you about the business outlook for your firm? 100% 100% 87% 90% 80%
70% 60% 50% 40% 30%
20%
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
The competitive landscape
It is perhaps no surprise that the market, seeing the sector as have focused on those areas of law competition is considered to have highly lucrative but not in the way more complementary to the rest increased in the last 12 months. it is currently serviced. Almost of their practice and where they The magnitude of that increase certainly using technology in their believe the financial returns are is perhaps of more interest, with service delivery and operational the greatest. an extra 10% of respondents this models, the ALSPs will add to the year saying that competition has threat already seen by firms from The Big 4 operate some of the most ‘significantly increased’. their normal competitors. successful professional practices firms on the planet and after many The legal sector has shown growth Back in the 1990s and early in years of experience of auditing the materially ahead of inflation for a the 21st century, accountancy majority of the top 100 law firms number of years. There is a sense firms entered the legal market in the UK, they are well placed, that a continuation of this growth by replicating (and in some cases highly knowledgeable and well- requires increased amounts of effort buying) traditional law firms and funded. In other words, they are each year and to quote a managing copying their approach. This time, in prime position to exploit the partner in a recent conversation, however, the approach is different. opportunities in the legal sector. “we are performing well, but Without much fanfare, the Big everything just seems harder”. 4 accountancy firms have now Of course, this doesn’t mean that amassed an estimated global fee all law firms are doomed but they What is surprising is that by far and earner base of over 10,000, using will need a strategy not just to away the biggest threat is from technology to deliver a more cost- fight off the current usual suspects current direct competitors. This effective approach. but also the emerging threat of may be because law firms tend to the ALSPs. encounter the usual suspects when Rather than being full service (and competing for work. However, potentially having to subsidise take a step back and the greatest those practice areas that don’t challenge may just be emerging. perform to the same level), they
Alternative Legal Service Providers (ALSPs) are a growing presence in Tim Adams Assurance and Business Services +44 (0)20 7131 4946 [email protected]
1010 Changing business structures
11 2 2 12 Changing business structures What next for the partnership model?
For the first time, our survey asked respondents what they thought about the LLP business structure, which has become standard across the legal sector. The results, which were certainly surprising, offer an interesting insight into the changing shape of the UK legal sector.
Although 29% of respondents said the LLP was the ideal structure stated that being an LLP was the for them. ideal structure for their business, 30% suggested that they would Many larger corporate clients are be looking to move away from demanding lower fees, faster this structure to run the business delivery of work and greater as a corporate. Meanwhile 21% transparency of the legal process. reported that they had already For some firms these have become moved away from this structure the key factors to winning while a further 18% indicated that business and retaining clients. the LLP structure was proving to The investments in enhancing be a constraint on their business as client experience and managing they grow. Adding these responses workflow would seem to support together, some 69% of respondents this view with investments in indicated that the LLP structure workflow solutions on the one hand was not ideal for their business. helping to drive down costs through enhanced process efficiency while simultaneously delivering a more streamlined legal process.
To what extent does the partnership model assist you Looking back, it was only 15 years in running your business? ago when many law firms sought safety in the LLP structure, which was designed to reduce the financial exposure of individual partners. It assists us but we are or intend to Today, this risk-structured approach run the business as a corporate 2% is beginning to look outdated. 18% 30% It is the ideal structure for our business Arguably, the LLP model does not possess the decision-making agility We have already moved away of a PLC. Attempting to carry from the partnership model consensus across the partnership It is proving to be a constraint (which could be made up of in 21% on our business as we grow excess of 500 partners) can be cumbersome, while it can also We are actively looking to move force too narrow a focus on annual 29% away from the partnership model results, rather than the benefits of long-term investment.
In the last few years, the legal sector has seen the move away from the LLP with Gateley in 2015, Firms in London appear to be Keystone and Gordan Dadds in the least likely to change their 2017, Rosenblatt and Knights in structure, stating that it is the ideal 2018 and, finally, DWF in March structure for them - this is of course 2019 all moving to a PLC status. where the biggest firms are located. There are many good reasons for moving along this path, including Firms in the North that answered an enhanced ability to attract top this question have already changed 13 talent through attractive share or are planning to change. Only one option models. It also negates the need for mergers as a route to growth, a model often disliked by What structure do you believe your firm will have in partners. the next 3-5 years? However, it is likely that such 58% radical change will not happen soon for most large law firms, if at all, 19% with 58% of survey respondents 14% A limited liability partnership indicating that they are most likely 5% 4% still to be an LLP in three to five A limited company years’ time. One option therefore is A combination of the above for firms to incorporate additional companies into their structure to Other (please specify) operate alongside the LLP in the way that Eversheds-Sutherland is A general partnership aiming to do with Konexo.
Looking at first choice responses for areas of opportunity, a focus on specialist sectors (32%) takes the number one spot from investments in technology (15%). However, Which of the following do you consider to be the biggest when aggregating responses for all opportunities for your firm over the next two to three years? three choices, both activities tie on 61% each, indicating a small shift from last year when technology Focus on specialist sectors just pipped specialist sectors to the number one position. Investment in technology
When questioned further on M&A, Merger or acquisition results revealed that London are the Expanding your range most bullish firms, stating that they of legal services will either acquire/combine with a Lateral hires smaller firm or hire a new team. Geographic expansion in the UK 1st choice Geographic expansion was once Expanding your range of non-legal services 2nd choice again low down the list with Investment in brand development only 13% of respondents citing 3rd choice this area as an opportunity over Geographic expansion overseas the next few years. London (14%) was the only region where Investment in training more than two firms expressed a Obtaining external investment desire to expand within Europe. to fund expansion Notably, more that a third (36%) More effective use of office space of London-based firms expressed 0% 5% 10% 15% 20% 25% 30% 35% a desire to expand within the UK - this could well be a move to create low-cost legal centres.
This tallies with responses to Does your firm expect to expand geographically in questions around future expansion the next 12 months? plans where just under half (50%) of respondents said they had no plans for expansion in the next No 12 months while the majority of those with plans were intending Yes - within the UK to focus on the UK (38%). Firms in all regions expressed a desire to Yes - within Europe expand within the UK. Yes - elsewhere These results further underline the (please specify where) earlier comments made around the retention of talent and show that Yes - in Asia Pacific law firms generally feel that future opportunities and growth come 0% 10% 20% 30% 40% 50% 60% from specialist teams. This is seen in continued activity in lateral hires from one firm to another. 14 15 The LLP Structure
For almost two decades, an add-on acquisition or make whereas a limited company brings limited liability partnerships have large investments in staff or IT, requirements on NI and PAYE. been the standard operating it needs additional capital. Yet in A limited company structure structure for professional an LLP, all profits are allocated may also bring in external practices. The structure seemed to partners in the business in the shareholders, which gives a new to have some notable advantages: year that they’re earned and are level of accountability. it minimised the liability of taxed on that basis. The structure individual partners, while, from doesn’t facilitate the retention of Some law firms have gone down a tax perspective, partners could working capital. this route. There is no right or remain self-employed. wrong answer but if working There is also the problem of staff capital, staff retention or the At the time of conversion from the retention. The LLP structure division of the business are traditional partnership structure, doesn’t allow for any participation a concern, then it is worth few firms considered alternatives in the ownership of the business considering a change. in any depth. However, the legal prior to achieving partnership world has changed. ABS reforms level. A limited company, in have allowed new competition, contrast, would allow for share such as the large accountancy options and may enable firms to firms. Many law firms have started reward talent better. to consider adding consultancy services and other diversification Law firms need to weigh up to their legal practices. the additional transparency requirements for a limited The LLP model doesn’t make company. Equally, there are embracing new business lines also tax implications – in an LLP, easy. If a law firm wants to make partners are taxed personally
Fiona Westwood Partner, Assurance and Business Services +44 (0)117 376 2066 [email protected]
1616 Continuity and change
17 3 3 18 Continuity and change Pam Sayers, a partner in the private client tax services team, is retiring from Smith & Williamson in 2020. She gives her thoughts on how the legal industry has changed, good and bad, and her plans for succession.
Many of the changes in the culture, trialling a working- Equally, the technology at the legal industry over the past from-home day after I had my time would look antiquated to the 25 years reflect broader changes two children and pushing for the modern eye. Twenty five years ago, to working culture: on the one technology to help agile working. I remember struggling with Lotus hand greater flexibility, on the I have helped enshrine the same Notes and 16-column hand written other an exhausting need to rights for my dedicated tax spreadsheets as well as typewriters be responsive on a 24/7 basis. team, all of whom are women by and fax machines. It was a clumsy Technology has created efficiency coincidence rather than design. way to do business and technology and enabled agile working, while Never ‘behind glass’, I have sought has helped make working methods bringing new pressures. At the to encourage the team to achieve far more efficient. same time, increasing regulation its full potential, believing in has changed relationships. The them even when they struggled to However, it has had a notable world for graduates starting today believe in themselves. disadvantage in terms of creating will look very different. a 24/7 working culture. The level I have been rewarded with loyalty of email traffic is undoubtedly a When I joined Smith & Williamson, – two of my team have worked barrier to efficiency. It also helps the workplace was unrecognisable for me for over 20 years. This has accelerate client demands – we from today. People smoked in helped with succession planning. need to be ‘on’ 24/7, which puts the office, maternity leave was My clients have longstanding pressure on staff even when they an afterthought and partners sat relationships with other team are on holiday. This is now a major in closed-off offices. The era of members; I never go to meetings problem for all professional firms, open-door policies, equal rights alone, so my clients know them which are expected to be constantly and workplace wellbeing was some well. In fact, my client base looks available for their clients. This may way ahead. very similar to when I started. I be one of the reasons why talent still act for a large law firm that retention is such a challenge for I believe I have done my part has been a client throughout my firms and I believe working practices to help forge a more inclusive time at Smith & Williamson. may need to be reviewed.
19 Pam Sayers Partner, Partnership Tax Services +44 (0)20 7131 4317 [email protected]
Regulation has become an partnerships, whereas now the The make-up of the next increasingly dominant feature vast majority operate as a Limited generation coming into the of my work. Firstly, in terms of Liability Partnerships and there is business may look different. the increasing record-keeping a question (for my successors to Tuition fees have prompted a requirements in relation to Anti- advise on) as to whether this goes rethink around recruiting from Money Laundering, GDPR and the one step further, with more law university. Increasing numbers Bribery Act, but also now with firms floating. This is in its infancy are now joining straight from much more emphasis on properly but I expect to see more of it over school – with graduate and non- understanding risk both in terms the next few years. graduate entry now 50/50 across of the client’s activities and in the some accountancy firms. It is way we advise and ensuring we The changing approach of HMRC increasingly acceptable for young mitigate risk appropriately. has also made itself felt. The people not to go to university and opportunities for complex tax access to a wider population will The type of advice I provided planning have rightly been help improve diversity among firms started to move from domestic to reduced as HMRC has made a and improve social mobility more international long before Brexit concerted attempt to close generally. For the business, they became an issue. I have advised down loopholes. We have seen get recruits at an earlier stage and on international expansion, legislation come in around transfer the opportunity to shape them mergers and takeovers. This pricing and service companies, from a younger age, but it also brings new complexities, well plus salaried members' legislation. means people deciding on their beyond the standard advice on There has also been a closing of initial career earlier in life. moving premises, partner tax loopholes around employers’ NI, planning or similar. albeit this has all led to increased As I head towards retirement, I am amounts of tax legislation and confident that my former clients The reality of the collapse rules to keep on top of. will be in safe hands. of various law firms has also changed the industry. Partners The industry has become far more have long understood that firms competitive. Whereas it may once could collapse in theory but the have been possible to shake hands problems at groups such as KWM on an appointment after a single Europe, for example, or Cobbetts meeting, today the partner may have made it a stark reality. At find themselves in a beauty parade the outset of my career, almost with four or five other firms. all my clients operated as general
20 The continued dominance of legal technology
421 22 The continued dominance of legal technology
As in previous years, technology continues to be a highly important strategic pillar of all law firms as they continue to react to client demand, new competitive forces and the ongoing challenge of an increasingly digital workplace.
This year, cyber-security has moved and deliver robust systems to keep client experience (last year’s top to the top of the list, with 31% of client data secure. investment area). These results respondents indicating they will indicate that firms continue their significantly increase investment Running a very close second, with pursuit of improved efficiency with in these systems to enable their 30% planning to invest significantly, the client sitting at the heart of firms to stay on top of security is the automation of manual what they are doing. processes and enhancing the
To what extent are you planning to increase investment in each of these technologies?
0% 10% Cyber-security Automation of manual processes 20% Enhancing client experience Document management Artificial intelligence (AI) for process enhancement Remote working 30% Creating new service models Significantly increase Enhancing the digital brand Managing workflow Moderately increase Pricing analytics 40% Social media On-line service provision Neither increase nor decrease 50% Moderately decrease
Significantly decrease 60%
70%
80%
90% 100% 23 Looking at the priority of However, pricing analysis is just make adjustments almost on an technology investments over the one piece of a more complex intra-day basis.” next 12 months, however, shows puzzle, which incorporates a slightly different picture. At efforts to enhance the client This shows that investments in the top, with 78% of respondents experience with collaboration and technology cannot necessarily be ranking it in their top four communication tools to create a compartmentalised as the lines investments, is pricing analysis transparent client engagement are blurred or the solutions that which is continuing to heat up as experience. As one partner put it are produced cut across many a key area of strategic focus. By different aspects of the legal analysing the data in a practice “we focus on transparency and delivery process. Although in the management system firms can immediacy so the accounts example used here one would hope identify matters of a similar nature should never come as a surprise that improvements to pricing and and interrogate historical billing to the client… the feedback availability for clients to see billing information to identify future loop we have on our billing data would mean a positive impact pricing models. system is so tight that we can on lock-up.
Top technology investments for the next 12 months
Pricing analytics
Enhancing the client experience
Collaboration and communication
Document management
Artificial intelligence (AI) for document analysis
Cybersecurity
Managing workflow
Creating new service models
AI for any other uses
On-line service provision
Remote working
Use of social media
0% 20% 40% 60% 80% 100%
Ranked 1 - 4 Ranked 5 - 8 Ranked 9 - 12 24 Is lock-up coming down at last?
525 26 Is lock-up coming down at last?
Firms say that lock-up will improve year-on-year and the responses from the 2019 survey are little different, with 79% saying they will see slight or significant improvement, down from 83% last year.
The strategy for improved lock- To what extent do you think the current level of lock-up in up appears to centre around your firms will change in the next 12 months? improved information for partners so they can make better billing Slight improvement Significant improvement About the same decisions. In larger firms, these activities extend further into providing client access to granular information, thereby providing transparency across the billing process. Coupled with ‘agile’ 62% 17% 15% and accurate time capture, the firms that have invested in these systems and processes can potentially reap large rewards. Slight deterioration Significant deterioration History has taught us, however, that relying solely on an IT solution to fix problems that are deeply rooted in the operational psyche of a business will not deliver the desired results. A 4% 2% strong change management and training programme is required and for this to be truly successful firms need to instil the importance of best practice in their lawyers as trainees, rather than just To what extent have you changed your approach to changing the habits of partners managing lock-up in the last 12 months? and senior associates. Improved the quality and Regionally, firms in London and transparency of information the North were the most confident that they would improve lock-up Lock-up performance now formally over the next 12 months. This may part of performance assessment indicate that they are investing Training to educate partners and heavily in technology in this area. fee earners
As research undertaken by Smith & Developed/enhanced credit Williamson in June this year shows, control function debtors were up 9% on in work in Lock-up performance directly progress, with £5.7bn billed but linked to remuneration not paid and a further £2.1bn work Automated billing and/or in progress. If for some reason one collection processes or more large clients were to stop paying their bills, how long could Changed credit teams firms continue to pay their lawyers? Developed separate billing team Many would say this will never happen, but it did in 2009 with the Introduced online payments demise of Lehman Brothers and Offered discount for prompt what the fallout from Brexit may settlement be remains anyone's guess. 0% 20% 40% 60% 80% 100% 27 Significantly changed Moderately changed Not at all changed The importance of cash
Partners in legal practices accounts for the 2017/18 year, on cash balances by around £1m; a may struggle to comprehend average, firms only had enough £100m turnover firm and the impact the minutiae of UK Accounting cash balances to pay the next would be around £2m. If the delay Standards and how annual profit is three weeks of wages. is longer, the reduction increases by calculated. I know most partners £1m or £2m each week. do not understand how their tax In light of this information, why reserving is calculated. However, aren’t more partners interested Suppose the economic shock I would expect most partners to and perhaps concerned about the then dampens work levels over understand cash. apparent lack of cash available? November, December and into The reality of course, is that, January (while costs remain at Yet, if you ask a partner to course, before the next payroll run their historic level). VAT and rent summarise the current financial is undertaken, clients will have will be payable in December or strength of their firm, most settled their outstanding invoices January and then for most firms, struggle to come up with any and more cash will have been there is the prospect of settling useful data. Some may be able to received. After all, at the end of the partners’ tax liabilities at the recall the level of the firm’s bank the 2017/18 year ends, there was end of January. balance, which they probably over £5bn of outstanding invoices saw in last month’s management due to the top 50 law firms - So if you don’t currently know how accounts. However, a balance, plenty to be received. many weeks of wages your firm several weeks out-of-date, is not can support and the likely impact much use if you don’t have any But what if there was a bit of an of the events above on your idea of what level of payments economic shock – Brexit, a change practice, maybe it is a question are expected to be made over the of government, US foreign policy you ought to ask. next few weeks and months. or terrorism? While the shock might be short-lived, it may not Generally, it isn’t the role of a have to last too long to cause real partner to understand as these problems for law firms’ cash flow. sorts of questions are delegated to the firm’s Finance team. However, In any one of these scenarios, would you want to know if you assume the instant impact is that weren’t holding enough cash clients delay paying their lawyers, to, say, pay the next month’s albeit only by a week. If you wages? Based on the research we operate in a £50m turnover firm, undertook of the top 50 law firm’s this would permanently reduce your
Giles Murphy Head of Professional Practices +44 (0)20 7131 4369 [email protected]
2828 Brexit
629 30 Brexit
Much has been written about Brexit and, three years on, the only thing that remains clear is that no one knows what the impact will be. While last year’s report focussed on Brexit, this year we are treating it as a footnote with the possibility of a final decision having been made just after this report is published.
On balance, is Brexit viewed as an opportunity or a threat to your firm?
As in the last two years, our survey asked respondents if Brexit would pose an opportunity or a threat and once again the respondents were split down the middle 53:47. Despite Opportunity this continued uncertainty, 69% of respondents underlined an ongoing optimism for short-term business opportunities, 53% Threat with 62% regarding it as an opportunity to expand the specialist services they offer their clients and 61% seeing an 47% opportunity to expand their client base. Conversely, only 21% anticipated opportunities for geographic expansion.
By 31st October we may have a final decision, in which case in 12 months’ time our report can focus on the real, measurable impact of the UK’s decision to leave the EU.
What opportunities do you think Brexit will generate for your firm? (Please rank your top three)
Levels of business in the short term
Opportunity to expand client base
Ability to expand specialist services that you currently offer
Geographic expansion into new markets
Levels of business in the long term
Recruitment of talent
Retention of talent
Reduced industry regulation
0% 10% 20% 30% 40% 50% 60% 70%
1st choice 2nd choice 3rd choice
31 About this survey
The 25th annual Smith & Williamson Law Firm survey was carried out across July and August 2019 and completed by 132 managing partners and senior management personnel from across the UK.
Regional breakdown
5% Scotland
16% North
11% 7% Midlands East
40% London 7% South West 14% South East 32 Our services to professional practices
Recognised as a leading firm in this market, we have experience of advising over 100 professional practices.
Our professional practices team has over Our clients include firms of lawyers, 50 partners, directors and support staff. surveyors, engineers, architects, We offer a coordinated, cross-discipline actuaries, patent agents, trademark approach and provide all-round attorneys and barristers’ chambers, accounting, tax, business, investment as well as the individuals within management and financial planning these organisations. advice tailored to the needs of you and your firm. To ensure we meet your international needs, we are a member of Nexia Recognised as a leading firm in this International, the ninth largest global market, we have experience of network of independent accounting and advising over 100 professional practices consulting firms.* operating as partnerships, LLPs and *International Accounting Bulletin companies, including those with Survey 2018. external investment.
33 Our professional practices team
Giles Murphy Pamela Sayers
Head of Professional Practices, Partnership Tax Services, Smith & Williamson LLP Smith & Williamson LLP
t: 020 7131 4369 t: 020 7131 4317 e: [email protected] e: [email protected]
Tim Adams Fiona Westwood
Assurance and Business Services, Assurance and Business Services, Smith & Williamson LLP Smith & Williamson LLP
t: 020 7131 4946 t: 0117 376 2066 e: [email protected] e: [email protected]
Peter Ball Rebecca Combes
Partnership Tax Services, Partnership Tax Services, Smith & Williamson LLP Smith & Williamson LLP
t: 0117 376 2130 t: 023 8082 7624 e: [email protected] e: [email protected]
Andrew Cunnington Nick Learoyd
Financial Services, Smith & Williamson Assurance and Business Services, Financial Services Limited Smith & Williamson LLP
t: 020 7131 4448 t: 020 7131 4512 e: [email protected] e: [email protected]
Karen Knapp Emma Neoh
Partnership Tax Services, Partnership Tax Services, Smith & Williamson LLP Smith & Williamson LLP
t: 020 7131 4413 t: 020 7131 4238 e: [email protected] e: [email protected]
34 34 smithandwilliamson.com
Smith & Williamson is a member of Nexia International, a worldwide network of independent accounting and consulting firms.
Offices: London, Belfast, Birmingham, Bristol, Cheltenham, Dublin (City and Sandyford), Glasgow, Guildford, Jersey, Salisbury and Southampton. Smith & Williamson LLP Regulated by the Institute of Chartered Accountants in England and Wales for a range of investment business activities. A member of Nexia International. Nexia Smith & Williamson Audit Limited Registered to carry on audit work and regulated by the Institute of Chartered Accountants in England and Wales for a range of investment business activities. Smith & Williamson Financial Services Limited Authorised and regulated by the Financial Conduct Authority. The Financial Conduct Authority does not regulate all of the products and services referred to in this document, including Tax, Assurance and Business Services. App: 155619hp Exp: 09/10/2020. 35