Fees drive revenue growth

Legal firms overall had success in increasing fees over the previous 12 months, with 69% of all those surveyed reporting increases. But while all Top 20 firms reported increased revenues over the previous 12 months, only two thirds of smaller firms reported increased revenue. Some (9%) reported a decline in revenues.

Fee increases were almost universal among Top 20 firms (9 in 10), while a majority of smaller firms (seven in 10) increased fees. In terms of trends, this reflects the continuing surge in firms passing on fee increases seen in recent years. Increasing fees tops the list of the range of tactical initiatives undertaken to improve financial performance (see p10 of the report for a full list of initiatives undertaken). Fee pressure is a bigger issue for smaller firms. Half of firms surveyed outside the Top 20 cite fee pressure as a key challenge, an issue which didn’t feature significantly for the larger firms.

For the sector, there is a trend of significant improvement in revenues overall since 2020. However, smaller firms are still behind larger rivals.

Sector outlook

Although approximately one in four firms think the legal sector generally improved over the past 12 months and will continue to do so in the next 12, a notable minority — consisting exclusively of smaller firms — believe that the outlook for the legal sector in Ireland has deteriorated in the last year (17%) and is expected to remain challenging in the next 12 months (19%).

Performance: “Focus on growth vs. reducing costs”

Reported firm profitability is indicative of the divergence of the legal sector between larger and smaller firms. Top 20 firms were almost universally able to convert increased revenue to increased profits and were more successful in maintaining margin.

For smaller firms, growing revenues didn’t translate as effectively into improved profitability. Only half reported increased profits and nearly one in five signalled a decline in their profitability, notably experiencing a greater squeeze on their margins.

All of the Top 20 firms reported increased revenues over the last 12 months with almost all reporting increased profits. Smaller firms struggled more, with only two thirds reporting increased revenues and only half increasing their bottom line. Firms overall had success in increasing fees. 

Smaller firms focused on reducing operational costs. Top 20 firm’s performance was driven by focussing on sales and marketing, new markets and services and engaging third party advisers by an order of approximately 3 to 1 as compared to non-Top 20 firms.

Challenges: retaining talent for larger firms vs fee pressure for smaller firms 

Staff retention is the number one key issue for law firms (according to 51% of firms overall), though it is a more pressing issue for firms of scale and, interestingly, the evidence indicates that for firms outside the Top 20 staff retention is not a significant issue.

For larger firms, primarily in Dublin, attracting and retaining staff is a real issue, with firms continuing to respond with pay and reward package increases over the previous 12 months, with 9 in 10 delivering pay increases of up to 15%, as well as a variety of other initiatives.

For smaller firms, the challenge of attracting and retaining staff may not be as significant as perceived. Seven in 10 non-Top 20 firms report low turnover of staff, 60% report they have no vacancies, and 40% did not have pay increases.

Attracting and retaining the right people is seen as the biggest challenge for the next three years for Top 20 firms, according to 69% of respondents. While 49% of non-Top 20 firms cite this as key challenge, fee pressure is a slightly bigger issue (50%) for smaller firms. 

See p12 of the report for a full list of challenges facing law firms.

Opportunities: “Lateral Hires for the Top 20 vs. M&A for non-Top 20 firms”

While M&A is seen as a big opportunity across the sector (with 75% of firms overall expecting consolidation over the next 12 months, and 15% of Top 20 and 48% of smaller firms) this is more aspiration than market reality where we know M&As are infrequent. Lateral hiring is the preferred mode for Top 20 firms to expand their range of legal services. See p15 of the report for the full list of opportunities facing law firms.

Partner financial health: “Many are left to make their own retirement plan”.

Across the sector, regardless of firm size, more than 4 in 10 partners are left to plan and manage their own financial and retirement planning without support from their firm. The key issue across the profession is a lack of time to focus on financial planning (6 in 10 respondents) while this issue is significantly more pronounced in firms outside the top 20. Only 13% of firms start to consider partner retirement planning on promotion to partner level. Top 20 firms perform better with 4 in 10 top 20 firms starting retirement planning on promotion to partner. Only half of firms manage retirement planning internally. Almost all firms encounter obstacles to providing suitable financial retirement planning for their partners.

John O'Callaghan, Managing Partner, Evelyn Partners Ireland Ltd comments:

“While smaller firms are more focused on ‘nuts and bolts’ challenges, their Top 20 competitors are focused on more strategic issues and are investing in initiatives and technology to address these. The scale and availability of capital in smaller firms means that strategic choices on where to invest resources are more important but often impeded by time and information constraints.

“We believe many firms find that the management information required to run an effective operation, maximise cash for investment and deliver efficient operations and client service is a significant impediment to progress.”

Con Casey, Head of Advisory, Evelyn Partners Ireland Ltd comments: 

 “Following a rollercoaster period of extreme pessimism and cautious optimism during the pandemic, the legal sector in Ireland has stabilised, somewhat reverting to trend. However, as we look to the future, we see a “Tale of Two Markets” with the top firms outperforming and full of optimism, while the majority of smaller firms outside the Top 20 anticipate stability at best.

“There are also some stark differences between Top 20 firms and smaller firms when looking at challenges they identify. While larger firms are more focused on the areas that will add value and are client focused, this contrasts with the more operational and compliance focus of their smaller rivals.” 

The full report is available for download.