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Has the LLP had its day?
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Smith & Williamson
@SmithWilliamson
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Executive summary 3
The changing competitive landscape 5
Changing business structures 11
Continuity and change 17
The continued dominance of legal technology 21
Is lock-up coming down at last? 25
Brexit 29
Contents
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Confidence and competitionConfidence across the legal market is a key factor we have measured since our first publication. It has tracked both the highs and lows of the legal sector, alongside domestic and global economic trends. It has provided a startlingly accurate insight into the business cycle for legal firms.
This year, confidence has taken a significant dip from last year’s all-time high with the US-China trade wars, tensions in the Gulf, the ongoing Brexit saga and signs of a weakening global and domestic economy all taking their toll on the levels of optimism across the industry. Running alongside this dip in confidence is the continued expectation of competitive pressures, both from familiar quarters and, increasingly, from the perceived threat of international firms cited to have superseded that of niche firms. The 'Big 4' accountants are also starting to make their mark.
The war for talentRetaining the right people is reported as the number one concern for the next three
years with 52% of respondents selecting this as one of their top three concerns. The legal press continues to be awash with stories of high-profile moves of both individuals and entire teams as firms vie for position in jurisdictions and product specialisms across the globe. In 1994, when we started running the law firm survey, movement of partners between firms was the exception rather than the rule and trainees often built a lifelong career at their firm.
Today, stories run on almost a weekly basis, highlighting the tensions between the traditional UK firms and those US firms seeking to strengthen their position in the UK market. New law companies and the Big 4 accountants are also posing a challenge to the traditional law firm model by offering a greater level of flexibility in working patterns. Key examples of this are the continuing success of PeerPoint or Vario.
As reported last year, the number of non-legal roles continues to grow. In June, Clifford Chance announced an A-level apprenticeship training scheme to build their
next generation of legal project managers while in December Norton Rose Fulbright launched a graduate scheme focussing on legal operations. These two initiatives show a significant shift over the last 25 years where these roles would not have existed and firms would not have considered employing non-graduates.
Corporate structures and strategies for growthFor the first time, the survey asked about corporate structures and whether the Limited Liability Partnership (LLP) model still best served the needs of the business. There is a clear view throughout the legal sector that being a pure LLP is not necessarily the best structure to take these organisations forward. This is a strong sign of just how much and how rapidly the legal sector has been changing over the last three to five years.
Although mergers and acquisitions continue to play their part in the reshaping of the industry, there are an increasing number of firms floating on the stock exchange to become a Public Limited Company (PLC). However, many firms have not taken this big step, possibly
Executive summaryIn 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.
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because they do not see a need to do so or they are uncertain about what model would work for them and therefore the risk is considered too great.
However, we have seen a growing number of off-shoots and law firms expanding into other services. Twenty five years ago, law firms stuck to the practice of law. Today, some are expanding into consultancy based services.
Legal technology Investments in technology continue to dominate both law firm budgets and their strategic direction. The focus is on improved efficiency and client integration through greater transparency and collaboration.
Our report shows that the simplified approach of defining technology investment by an individual term – collaboration, pricing strategy, automation – does not do justice to the complexity of the solutions being put in place. Improved pricing analysis comes out of implementing AI solutions across large data sets, which in turn deliver efficiency gains through improved resource management, and greater billing transparency to clients – multiple technologies coming together to
deliver broad benefits to both the firm and its clients.
In the last three years, much has been written about AI. Initially it was heralded as the next great revolution, but then there were questions about whether it was all hype and just another buzzword. Time has shown that it is not hype but AI cannot be considered in isolation. It is a composite part of a broader solution and is beginning to deliver results for the firms that have invested and persisted.
Still, still not getting the message on lock-upIn each of the past 25 years firms have said they will improve lock-up and every year the figures only show a marginal change. This year is no exception, with 36% of survey respondents saying that improved lock-up will be the key source of increased funding over the next 12 months and 79% expecting a slight or significant improvement in lock-up over the next 12 months.
For some, these hopes may not be unfounded if they are making significant inroads into their pricing analysis, time recording and billing solutions. However, for those who don’t employ a new
strategy in this area, lock-up will remain the same and quite possibly worsen at a time when uncertainty should encourage law firms to build strong cash reserves.
Brexit’s final act?The almost 53:47 division as to whether Brexit will offer up opportunities or create increased threats to business is similar to last year’s survey; a continued division of opinion that closely mirrors the referendum of three years ago. Any speculation in this report on the outcome of Brexit would be folly as it is published only weeks before the latest deadline of 31st October. We will leave our detailed analysis on that topic to next year.
Giles Murphy Head of Professional Practices
+44 (0)20 7131 4369 [email protected]
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The changing competitive landscape
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The competitive landscapeAre law firms beginning to feel the competitive pressures in an increasingly challenging market?
Although all regions generally reported an increase in competitive pressure, respondents in London appear to be feeling this more keenly than other regions.
94% of London respondents said they felt increased competitive pressure compared to an average of 76% across all other regions.
This correlates with other research that shows the growing threat of US law firms in the City.
There are many reasons for these changes over what has been a turbulent 12 months, with a myriad of geopolitical issues, including the ongoing Brexit saga, US–China trade wars, growing unrest in the Gulf as well as the tensions between
Russia and the West all adding to a tougher trading environment.
While law firms are not able to control these factors, they can mitigate other competitive threats. However, new entrants to the legal market, competition for talent and rising salaries remain key challenges.
Who do you anticipate being the main sources of competition?When rating these sources of competition in order of priority, the trends reported last year are little changed 12 months on. A firm’s current direct competitors continue to be the overwhelming source of concern, with 74% of
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.
51%
2018
2019
Slightly increased
Little or no change
Significantly increased
Slightly decreased
51% 33%
23% 26%
15% 1%
respondents citing this as their top competitive threat. The impact of international firms has jumped four places to become the second most common concern. Firms may be looking to Europe and the potential lift in work from the (eventual) conclusion of the Brexit story. While the issues that Brexit will raise in the short to medium term will not deeply affect firms in the top 50, due to their international reach, the smaller UK outfits may well be right to be concerned by the outcome.
The Big 4 accounting firms and the other legal companies have also moved up the table, indicating that 12 months on, law firms are finally realising that this threat is here to stay and this group is beginning to make serious inroads into their market.
However, while there is no doubt that the Big 4 and new legal companies are making an impact, it appears that large law firms are reacting to this competitive threat by creating their own alternative services. Firms are continuing to make investments in technology to help streamline legal service delivery, creating or acquiring low cost service centres to offer certain types of legal work at more competitive rates and, most
How do you think the level of competitive pressure in the legal profession has changed over the last year?
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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.
What do you anticipate as the main sources of competition for your firm over the next three years?
Current direct competitors
Online service providers
International firms
The Big 4 accountancy firms
Niche firms
In-house resources within client organisations
Other accountancy firms obtaining licenses to practice law
0% 10%
1st choice 2nd choice
50%30% 70%20% 60%40% 80%
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In-house teams continue to pose a second-choice concern for many respondents (23%), indicating a strengthening of these teams to reduce costs. These activities are more likely to affect smaller firms that undertake more of the routine work for these companies.
Talent management and 20 years of salary dataThe legal press continues to be full of stories about attracting and retaining talent, lateral hires and the movement of teams from one firm to another. The responses to the survey show continued anxiety around managing talent with further pressure from the growth of the competition across the legal sector.
Research on salaries over the last 20 years carried out by The Lawyer shows the salary gap between the biggest firms and the mid-tier to be wider than ever before. Twenty years ago virtually all firms paid their newly-qualified lawyers the same; today this gap can be as wide as £23,000. Taking Hogan Lovells as an example, this graph shows the recent acceleration in pay for newly-qualified lawyers compared to trainees.
Looking beyond issues of talent management, the survey results show that the challenges reported last year persist today. This raises the question of what, if anything, firms are doing to alleviate these pressures. Admittedly, improving efficiency (a top concern for 35%) may not happen overnight but when this issue is rated in the top four, year after year, it brings into question the efficacy of the strategies put in place or, alarmingly, whether firms really have the appetite to address and resolve this issue. In a world of increasing competition and hardening economic factors, many of these concerns need to be addressed not only to meet the competitive challenges but also to create room for firms to focus on other issues raised in this evolving sector.
Although differentiation has always been on the minds of firms, it looks like it is beginning to take on a new level of concern. This is, in part, due to the rise in the competition for delivering legal services but also as a result of the emerging trend to diversify away from legal services into consulting services. The evolution of the traditional law firm has never looked quite so dynamic and it will be interesting to see how many firms will follow this diversified path over the next few years.
Hogan Lovells salaries since 1998£100,000
£80,000
£70,000
£40,000
£10,000
£90,000
£50,000
£20,000
£60,000
£30,000
£0
98
First year trainee Second year trainee NQ
01 0905 13 1799 02 1006 14 1800 0804 12 1603 1107 15 19
Which of the following do you consider the biggest challenges for your firm over the next two to three years?
0% 10% 20% 40%30% 50% 60%
Retaining the right talent
Pressure on fees
Improving efficiency
Managing succession
Adopting new technologies
Differentiating my firm from competitors
Attracting the right talent
New forms of competition
Changing client requirements
1st choice 2nd choice 3rd choice
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Perhaps as a result of the jitters created by increased competitive pressures from new entrants into the legal sector, the increasingly uncertain political outlook and the early warning signs of a global recession, the level of business confidence for the year ahead has taken a significant dip
from last year’s high. Only 87% of respondents reported feeling reasonably or very confident about the business outlook.
Looking at the barometer of business confidence below, the declining confidence reported this year appears to be tracing a
similar pattern to 2007 and into 2008. This is not to say that our survey is predicting a financial crash on the scale of 2008, but it does suggest the early warning signs in the markets are beginning to be reflected in levels of business confidence.
It is perhaps no surprise that competition is considered to have increased in the last 12 months. The magnitude of that increase is perhaps of more interest, with an extra 10% of respondents this year saying that competition has ‘significantly increased’.
The legal sector has shown growth materially ahead of inflation for a number of years. There is a sense that a continuation of this growth requires increased amounts of effort each year and to quote a managing partner in a recent conversation, “we are performing well, but everything just seems harder”.
What is surprising is that by far and away the biggest threat is from current direct competitors. This may be because law firms tend to encounter the usual suspects when competing for work. However, take a step back and the greatest challenge may just be emerging.
Alternative Legal Service Providers (ALSPs) are a growing presence in
the market, seeing the sector as highly lucrative but not in the way it is currently serviced. Almost certainly using technology in their service delivery and operational models, the ALSPs will add to the threat already seen by firms from their normal competitors.
Back in the 1990s and early in the 21st century, accountancy firms entered the legal market by replicating (and in some cases buying) traditional law firms and copying their approach. This time, however, the approach is different. Without much fanfare, the Big 4 accountancy firms have now amassed an estimated global fee earner base of over 10,000, using technology to deliver a more cost-effective approach.
Rather than being full service (and potentially having to subsidise those practice areas that don’t perform to the same level), they
have focused on those areas of law more complementary to the rest of their practice and where they believe the financial returns are the greatest.
The Big 4 operate some of the most successful professional practices firms on the planet and after many years of experience of auditing the majority of the top 100 law firms in the UK, they are well placed, highly knowledgeable and well-funded. In other words, they are in prime position to exploit the opportunities in the legal sector.
Of course, this doesn’t mean that all law firms are doomed but they will need a strategy not just to fight off the current usual suspects but also the emerging threat of the ALSPs.
Tim Adams Assurance and Business Services
+44 (0)20 7131 4946 [email protected]
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Looking at the year ahead, how confident are you about the business outlook for your firm?
90%
100%
80%
70%
60%
50%
40%
30%
20%
2017201620152014201320122011201020092008200720062005200420032002 2018 2019
100%87%
The competitive landscape
Business outlook
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Changing business structures
2
122
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Changing business structuresWhat next for the partnership model?
Although 29% of respondents stated that being an LLP was the ideal structure for their business, 30% suggested that they would be looking to move away from this structure to run the business as a corporate. Meanwhile 21% reported that they had already moved away from this structure while a further 18% indicated that the LLP structure was proving to be a constraint on their business as they grow. Adding these responses together, some 69% of respondents indicated that the LLP structure was not ideal for their business.
Firms in London appear to be the least likely to change their structure, stating that it is the ideal structure for them - this is of course where the biggest firms are located.
Firms in the North that answered this question have already changed or are planning to change. Only one
said the LLP was the ideal structure for them.
Many larger corporate clients are demanding lower fees, faster delivery of work and greater transparency of the legal process. For some firms these have become the key factors to winning business and retaining clients. The investments in enhancing client experience and managing workflow would seem to support this view with investments in workflow solutions on the one hand helping to drive down costs through enhanced process efficiency while simultaneously delivering a more streamlined legal process.
Looking back, it was only 15 years ago when many law firms sought safety in the LLP structure, which was designed to reduce the financial exposure of individual partners. Today, this risk-structured approach is beginning to look outdated. Arguably, the LLP model does not possess the decision-making agility of a PLC. Attempting to carry consensus across the partnership (which could be made up of in excess of 500 partners) can be cumbersome, while it can also force too narrow a focus on annual 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, Keystone and Gordan Dadds in 2017, Rosenblatt and Knights in 2018 and, finally, DWF in March 2019 all moving to a PLC status. There are many good reasons for moving along this path, including an enhanced ability to attract top talent through attractive share
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.
To what extent does the partnership model assist you in running your business?
It assists us but we are or intend to run the business as a corporate
We have already moved away from the partnership model
It is proving to be a constraint on our business as we grow
We are actively looking to move away from the partnership model
It is the ideal structure for our business18% 30%
29%
21%
2%
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option models. It also negates the need for mergers as a route to growth, a model often disliked by partners.
However, it is likely that such radical change will not happen soon for most large law firms, if at all, with 58% of survey respondents indicating that they are most likely still to be an LLP in three to five years’ time. One option therefore is for firms to incorporate additional companies into their structure to operate alongside the LLP in the way that Eversheds-Sutherland is 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, when aggregating responses for all three choices, both activities tie on 61% each, indicating a small shift from last year when technology just pipped specialist sectors to the number one position.
When questioned further on M&A, results revealed that London are the most bullish firms, stating that they will either acquire/combine with a smaller firm or hire a new team.
Geographic expansion was once again low down the list with only 13% of respondents citing this area as an opportunity over the next few years. London (14%) was the only region where more than two firms expressed a desire to expand within Europe. Notably, more that a third (36%) of London-based firms expressed a desire to expand within the UK - this could well be a move to create low-cost legal centres.
This tallies with responses to questions around future expansion plans where just under half (50%) of respondents said they had no plans for expansion in the next 12 months while the majority of those with plans were intending to focus on the UK (38%). Firms in all regions expressed a desire to expand within the UK.
These results further underline the earlier comments made around the retention of talent and show that law firms generally feel that future opportunities and growth come from specialist teams. This is seen in continued activity in lateral hires from one firm to another.
A limited liability partnership
Focus on specialist sectors
Geographic expansion overseas
Lateral hires
Merger or acquisition
Obtaining external investment to fund expansion
Expanding your range of non-legal services
Investment in technology
Investment in training
Geographic expansion in the UK
Expanding your range of legal services
More effective use of office space
Investment in brand development
A combination of the above
A limited company
Other (please specify)
A general partnership
1st choice
2nd choice
3rd choice
What structure do you believe your firm will have in the next 3-5 years?
Which of the following do you consider to be the biggest opportunities for your firm over the next two to three years?
58%19% 14%
5% 4%
Does your firm expect to expand geographically in the next 12 months?
0%
0%
10%
5%
20%
10%
40%
20%
30%
15%
50%
25%
60%
30% 35%
No
Yes - in Asia Pacific
Yes - within Europe
Yes - within the UK
Yes - elsewhere (please specify where)
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Fiona Westwood Partner, Assurance and Business Services
+44 (0)117 376 2066 [email protected]
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For almost two decades, limited liability partnerships have been the standard operating structure for professional practices. The structure seemed to have some notable advantages: it minimised the liability of individual partners, while, from a tax perspective, partners could remain self-employed.
At the time of conversion from the traditional partnership structure, few firms considered alternatives in any depth. However, the legal world has changed. ABS reforms have allowed new competition, such as the large accountancy firms. Many law firms have started to consider adding consultancy services and other diversification to their legal practices.
The LLP model doesn’t make embracing new business lines easy. If a law firm wants to make
an add-on acquisition or make large investments in staff or IT, it needs additional capital. Yet in an LLP, all profits are allocated to partners in the business in the year that they’re earned and are taxed on that basis. The structure doesn’t facilitate the retention of working capital.
There is also the problem of staff retention. The LLP structure doesn’t allow for any participation in the ownership of the business prior to achieving partnership level. A limited company, in contrast, would allow for share options and may enable firms to reward talent better.
Law firms need to weigh up the additional transparency requirements for a limited company. Equally, there are also tax implications – in an LLP, partners are taxed personally
whereas a limited company brings requirements on NI and PAYE. A limited company structure may also bring in external shareholders, which gives a new level of accountability.
Some law firms have gone down this route. There is no right or wrong answer but if working capital, staff retention or the division of the business are a concern, then it is worth considering a change.
The LLP Structure
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Continuity and change
3
183
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Many of the changes in the legal industry over the past 25 years reflect broader changes to working culture: on the one hand greater flexibility, on the other an exhausting need to be responsive on a 24/7 basis. Technology has created efficiency and enabled agile working, while bringing new pressures. At the same time, increasing regulation has changed relationships. The world for graduates starting today will look very different.
When I joined Smith & Williamson, the workplace was unrecognisable from today. People smoked in the office, maternity leave was an afterthought and partners sat in closed-off offices. The era of open-door policies, equal rights and workplace wellbeing was some way ahead.
I believe I have done my part to help forge a more inclusive
culture, trialling a working-from-home day after I had my two children and pushing for the technology to help agile working. I have helped enshrine the same rights for my dedicated tax team, all of whom are women by coincidence rather than design. Never ‘behind glass’, I have sought to encourage the team to achieve its full potential, believing in them even when they struggled to believe in themselves.
I have been rewarded with loyalty – two of my team have worked for me for over 20 years. This has helped with succession planning. My clients have longstanding relationships with other team members; I never go to meetings alone, so my clients know them well. In fact, my client base looks very similar to when I started. I still act for a large law firm that has been a client throughout my time at Smith & Williamson.
Equally, the technology at the time would look antiquated to the modern eye. Twenty five years ago, I remember struggling with Lotus Notes and 16-column hand written spreadsheets as well as typewriters and fax machines. It was a clumsy way to do business and technology has helped make working methods far more efficient.
However, it has had a notable disadvantage in terms of creating a 24/7 working culture. The level of email traffic is undoubtedly a barrier to efficiency. It also helps accelerate client demands – we need to be ‘on’ 24/7, which puts pressure on staff even when they are on holiday. This is now a major problem for all professional firms, which are expected to be constantly available for their clients. This may be one of the reasons why talent retention is such a challenge for firms and I believe working practices may need to be reviewed.
Continuity and changePam 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.
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Regulation has become an increasingly dominant feature of my work. Firstly, in terms of the increasing record-keeping requirements in relation to Anti-Money Laundering, GDPR and the Bribery Act, but also now with much more emphasis on properly understanding risk both in terms of the client’s activities and in the way we advise and ensuring we mitigate risk appropriately.
The type of advice I provided started to move from domestic to international long before Brexit became an issue. I have advised on international expansion, mergers and takeovers. This brings new complexities, well beyond the standard advice on moving premises, partner tax planning or similar.
The reality of the collapse of various law firms has also changed the industry. Partners have long understood that firms could collapse in theory but the problems at groups such as KWM Europe, for example, or Cobbetts have made it a stark reality. At the outset of my career, almost all my clients operated as general
partnerships, whereas now the vast majority operate as a Limited Liability Partnerships and there is a question (for my successors to advise on) as to whether this goes one step further, with more law firms floating. This is in its infancy but I expect to see more of it over the next few years.
The changing approach of HMRC has also made itself felt. The opportunities for complex tax planning have rightly been reduced as HMRC has made a concerted attempt to close down loopholes. We have seen legislation come in around transfer pricing and service companies, plus salaried members' legislation. There has also been a closing of loopholes around employers’ NI, albeit this has all led to increased amounts of tax legislation and rules to keep on top of.
The industry has become far more competitive. Whereas it may once have been possible to shake hands on an appointment after a single meeting, today the partner may find themselves in a beauty parade with four or five other firms.
The make-up of the next generation coming into the business may look different. Tuition fees have prompted a rethink around recruiting from university. Increasing numbers are now joining straight from school – with graduate and non-graduate entry now 50/50 across some accountancy firms. It is increasingly acceptable for young people not to go to university and access to a wider population will help improve diversity among firms and improve social mobility more generally. For the business, they get recruits at an earlier stage and the opportunity to shape them from a younger age, but it also means people deciding on their initial career earlier in life.
As I head towards retirement, I am confident that my former clients will be in safe hands.
Pam Sayers Partner, Partnership Tax Services
+44 (0)20 7131 4317 [email protected]
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The continued dominance of legal technology
4
22
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The continued dominance of legal technology
This year, cyber-security has moved to the top of the list, with 31% of respondents indicating they will significantly increase investment in these systems to enable their firms to stay on top of security
and deliver robust systems to keep client data secure.
Running a very close second, with 30% planning to invest significantly, is the automation of manual processes and enhancing the
client experience (last year’s top investment area). These results indicate that firms continue their pursuit of improved efficiency with the client sitting at the heart of what they are doing.
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.
To what extent are you planning to increase investment in each of these technologies?
Cyber-security
Remote working
Pricing analytics
Automation of manual processes
Creating new service modelsEnhancing the digital brand
Social media
Enhancing client experienceDocument management
On-line service provision
Artificial intelligence (AI) for process enhancement
Managing workflow
0%10%
20%
30%
40%
50%
60%
70%
80%
90%100%
Significantly increase
Significantly decrease
Moderately increase
Moderately decrease
Neither increase nor decrease
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Looking at the priority of technology investments over the next 12 months, however, shows a slightly different picture. At the top, with 78% of respondents ranking it in their top four investments, is pricing analysis which is continuing to heat up as a key area of strategic focus. By analysing the data in a practice management system firms can identify matters of a similar nature and interrogate historical billing information to identify future pricing models.
However, pricing analysis is just one piece of a more complex puzzle, which incorporates efforts to enhance the client experience with collaboration and communication tools to create a transparent client engagement experience. As one partner put it
“we focus on transparency and immediacy so the accounts should never come as a surprise to the client… the feedback loop we have on our billing system is so tight that we can
make adjustments almost on an intra-day basis.”
This shows that investments in technology cannot necessarily be compartmentalised as the lines are blurred or the solutions that are produced cut across many different aspects of the legal delivery process. Although in the example used here one would hope that improvements to pricing and availability for clients to see billing data would mean a positive impact on lock-up.
Top technology investments for the next 12 months
Use of social media
Creating new service models
Remote working
Managing workflow
On-line service provision
Cybersecurity
AI for any other uses
Artificial intelligence (AI) for document analysis
Document management
Collaboration and communication
Enhancing the client experience
Pricing analytics
0% 20% 40% 80%60% 100%
Ranked 1 - 4 Ranked 5 - 8 Ranked 9 - 12
25
Is lock-up coming down at last?
5
26
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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-up appears to centre around improved information for partners so they can make better billing 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’ and accurate time capture, the firms that have invested in these systems and processes can potentially reap large rewards.
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 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 changing the habits of partners and senior associates.
Regionally, firms in London and the North were the most confident that they would improve lock-up over the next 12 months. This may indicate that they are investing heavily in technology in this area.
As research undertaken by Smith & Williamson in June this year shows, debtors were up 9% on in work in progress, with £5.7bn billed but not paid and a further £2.1bn work in progress. If for some reason one or more large clients were to stop paying their bills, how long could firms continue to pay their lawyers? Many would say this will never happen, but it did in 2009 with the demise of Lehman Brothers and what the fallout from Brexit may be remains anyone's guess.
To what extent do you think the current level of lock-up in your firms will change in the next 12 months?
To what extent have you changed your approach to managing lock-up in the last 12 months?
62% 17%
4% 2%
15%
Slight improvement About the sameSignificant improvement
Slight deterioration Significant deterioration
Improved the quality and transparency of information
Lock-up performance now formally part of performance assessment
Training to educate partners and fee earners
Developed/enhanced credit control function
Lock-up performance directly linked to remuneration
Automated billing and/or collection processes
Changed credit teams
Developed separate billing team
Introduced online payments
Offered discount for prompt settlement
0% 20% 40% 80%60% 100%
Significantly changed Moderately changed Not at all changed
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The importance of cashPartners in legal practices may struggle to comprehend the minutiae of UK Accounting Standards and how annual profit is calculated. I know most partners do not understand how their tax reserving is calculated. However, I would expect most partners to understand cash.
Yet, if you ask a partner to summarise the current financial strength of their firm, most struggle to come up with any useful data. Some may be able to recall the level of the firm’s bank balance, which they probably saw in last month’s management accounts. However, a balance, several weeks out-of-date, is not much use if you don’t have any idea of what level of payments are expected to be made over the next few weeks and months.
Generally, it isn’t the role of a partner to understand as these sorts of questions are delegated to the firm’s Finance team. However, would you want to know if you weren’t holding enough cash to, say, pay the next month’s wages? Based on the research we undertook of the top 50 law firm’s
accounts for the 2017/18 year, on average, firms only had enough cash balances to pay the next three weeks of wages.
In light of this information, why aren’t more partners interested and perhaps concerned about the apparent lack of cash available? The reality of course, is that, course, before the next payroll run is undertaken, clients will have settled their outstanding invoices and more cash will have been received. After all, at the end of the 2017/18 year ends, there was over £5bn of outstanding invoices due to the top 50 law firms - plenty to be received.
But what if there was a bit of an economic shock – Brexit, a change of government, US foreign policy or terrorism? While the shock might be short-lived, it may not have to last too long to cause real problems for law firms’ cash flow.
In any one of these scenarios, assume the instant impact is that clients delay paying their lawyers, albeit only by a week. If you operate in a £50m turnover firm, this would permanently reduce your
cash balances by around £1m; a £100m turnover firm and the impact would be around £2m. If the delay is longer, the reduction increases by £1m or £2m each week.
Suppose the economic shock then dampens work levels over November, December and into January (while costs remain at their historic level). VAT and rent will be payable in December or January and then for most firms, there is the prospect of settling the partners’ tax liabilities at the end of January.
So if you don’t currently know how many weeks of wages your firm can support and the likely impact of the events above on your practice, maybe it is a question you ought to ask.
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Giles Murphy Head of Professional Practices
+44 (0)20 7131 4369 [email protected]
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Brexit
6
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Brexit
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 this continued uncertainty, 69% of respondents underlined an ongoing optimism for short-term business opportunities, with 62% regarding it as an opportunity to expand the specialist services they offer their clients and 61% seeing an 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.
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?
Opportunity
Threat
What opportunities do you think Brexit will generate for your firm? (Please rank your top three)
0% 10% 20% 40%30% 50% 60% 70%
Levels of business in the short term
Levels of business in the long term
Ability to expand specialist services that you currently offer
Retention of talent
Opportunity to expand client base
Recruitment of talent
Geographic expansion into new markets
Reduced industry regulation
1st choice 2nd choice 3rd choice
53%47%
32
East
North
South East
Midlands
Scotland
40%
16%
14%
11%
5%
7%
South West7%
London
About this surveyThe 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
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Our services to professional practices
Our professional practices team has over 50 partners, directors and support staff. We offer a coordinated, cross-discipline approach and provide all-round accounting, tax, business, investment management and financial planning advice tailored to the needs of you and your firm.
Recognised as a leading firm in this market, we have experience of advising over 100 professional practices operating as partnerships, LLPs and companies, including those with external investment.
Our clients include firms of lawyers, surveyors, engineers, architects, actuaries, patent agents, trademark attorneys and barristers’ chambers, as well as the individuals within these organisations.
To ensure we meet your international needs, we are a member of Nexia International, the ninth largest global network of independent accounting and consulting firms.*
*International Accounting Bulletin Survey 2018.
Recognised as a leading firm in this market, we have experience of advising over 100 professional practices.
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Head of Professional Practices, Smith & Williamson LLP
t: 020 7131 4369 e: [email protected]
Assurance and Business Services, Smith & Williamson LLP
t: 020 7131 4946 e: [email protected]
Financial Services, Smith & Williamson Financial Services Limited
t: 020 7131 4448 e: [email protected]
Partnership Tax Services, Smith & Williamson LLP
t: 020 7131 4317 e: [email protected]
Partnership Tax Services, Smith & Williamson LLP
t: 0117 376 2130 e: [email protected]
Partnership Tax Services, Smith & Williamson LLP
t: 023 8082 7624 e: [email protected]
Partnership Tax Services, Smith & Williamson LLP
t: 020 7131 4413 e: [email protected]
Partnership Tax Services, Smith & Williamson LLP
t: 020 7131 4238 e: [email protected]
Assurance and Business Services, Smith & Williamson LLP
t: 020 7131 4512 e: [email protected]
Assurance and Business Services, Smith & Williamson LLP
t: 0117 376 2066 e: [email protected]
Our professional practices team
Giles Murphy
Tim Adams
Peter Ball
Andrew Cunnington
Karen Knapp Emma Neoh
Fiona Westwood
Rebecca Combes
Nick Learoyd
Pamela Sayers
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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.
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