Legal profession confidence tops pre-pandemic levels but firms face battle to hold onto talent

Annual survey by Smith & Williamson takes the pulse of law firms

• 97% are reasonably or very confident about the business outlook for their firm (up from a combined 80% in 2020, and 87% in 2019)
• Over 80% highlight talent retention as key challenge over the next two to three years
• More than two-thirds believe the pandemic accelerated change by between two and four years
• Productivity increases reported but 60% believe the pandemic has had a negative impact on cultivating a firm culture.

Confidence amongst law firms has topped pre pandemic levels, according to an annual survey of managing partners, chief officers, partners and senior partners. Some 97% of respondents are reasonably or very confident about the business outlook for their firm (up from 87% in 2019) and an increasing number have said they are expecting merger and acquisition activity over the next 12 months.

But the latest Smith & Williamson Law Firm Survey in association with The Lawyer, which draws on the opinions of 176 key decision makers at UK law firms, has also highlighted that talent retention is a key concern with over 80% of respondents expecting it to be a key challenge over the next two to three years (up from 38% last year).

The majority of respondents (two-thirds) believe the pandemic has accelerated change by between two and four years. Work/life balance and productivity are two areas where the impact of the pandemic appears to have had a positive impact. However, on collaboration, firm culture and maintaining influence, respondents have been frustrated, according to the survey.

On collaboration, 47.4% of respondents indicated that the pandemic has had a negative impact, as opposed to just 25% who said it had been positive. On maintaining influence, 24.8% of respondents believe the pandemic has had a negative impact, compared to 13.1% who believe it has been positive. Crucially, over 60% of respondents believe that the pandemic has had a negative impact on cultivating a firm culture.

The level of increase in competitive pressure within the legal profession is at a three-year low, according to Smith & Williamson’s survey. Just 20.6% of respondents think it has significantly increased (down from 32.2% in 2020 and 32.6% in 2019).

Nevertheless, it remains a highly competitive market, particularly in London, where US firms are making their presence felt. Last year, 23 US firms posted London office revenue increases in excess of 10%. Two of the eight largest law firms in London are now American. The heat is being particularly felt amongst larger organisations, with a third of respondents from firms with 500 or more partners indicating that competitive pressure had significantly increased over the past year. Just 12.2% of those in firms with 50 partners or less felt the same.

Last year’s survey found that 61% of respondents indicated they were not planning a merger, acquisition or team hire over the next 12 months (up from 26.7% a year earlier). That retrenchment appears to be over, with just 38.2% of respondents expecting to be inactive in M&A and team hires over the next year.

Giles Murphy, Head of Professional Practices at Smith & Williamson commented:

“Confidence amongst law firms is higher now than it was in 2019, back when nobody had heard of a virtual pub quiz and pandemics were only mentioned in low-budget Sci-fi movies. The legal profession is high on its relative success and we can expect to see an increase in mergers, acquisitions and team hires over the next 12 months.

“However, there is still more hesitancy around M&A than there was back in 2019. Potentially, the reported three-year high in business outlook confidence may suggest that firms are more confident in their ability to grow organically.

“Despite the general optimism, law firms do also face notable challenges, not least when it comes to retaining talent. Without the distraction of the rat race, lockdown has also given people a chance to think about their career goals, reflecting on how and where they’d like to work. To this end, the pandemic and a focus on both agile working and work/life balance may bring about increased staff turnover.

“If remote working is the great leveller, establishing a strong firm culture is going to be a crucial differentiator when it comes to attracting and retaining talent. Law firm leaders will need to consider their approach to factors such as collaboration, remote working, parental leave, international travel, diversity, and, of course, office space.

“Firms have a lot of cash in the bank, and for better or worse are seeing the year ahead as a time of opportunity. Firms would do well to consider cultural impact when deciding where to spend their cash from here.”