Top law firms turn to team poaching and tech to drive growth
Managing partners no longer see mergers as representing the best prospect of boosting profits
Top 200 UK law firms are moving away from market consolidation as a favoured growth strategy due to the perceived financial, reputational, and cultural risks associated with failed mergers, new research suggests.
The findings from Fox Williams and Byfield Consultancy mirror this year's market activity, with a large number of reported negotiations failing to produce a merger.
The new market report shows that just 26 per cent of respondent firms are looking to merge in the next two years. This reflects a significant change from last year's report, which showed 96 per cent of respondents from the top 200 firms forecasted substantial consolidation in the UK legal market over the next two years.
Despite only a quarter of respondents looking to merge in the foreseeable future, respondents who had merged provided positive feedback on their experience, with 79 per cent reporting an increase in client instructions.
In addition, 63 per cent of merged firms experienced a boost in combined profitability and just over half reported better financial stability post-merger. However, 86 per cent of respondents identified merging as having the greatest risk of reducing profitability when compared with other growth strategies.
More than four-fifths of firms (83 per cent) have instead chosen to invest in technology, seeing it as having the best prospect of increasing profits. Two in five firms reported investment of over £100,000 in the last 12 months to commoditise aspects of legal work. However, one half of firms still see technology as the biggest threat to the profession.
Team recruitment was the next favorite strategy (71 per cent), with 40 per cent of respondent firms having invested over £100K in acquiring teams over the last 12 months, a reflection of the perceived benefits.
Opening overseas offices was ranked as the least popular means of increasing profitability, with only 8 per cent of firms agreeing that increasing their international footprint had the best chances of raising profits.
Tina Williams, chair and head of professional practices at Fox Williams, said: 'Our new research confirms that law firms are looking beyond mergers to realise their ambitions, which reflects the difficulty firms often have in finding a suitable merger partner.
'Of the alternative growth strategies, investment in technology is seen to have both the greatest potential to increase law firm profitability, but is also regarded as the biggest threat to the profession as we currently know it.'
Risks to reputation are also at the forefront of growth strategy considerations. Almost two-thirds (63 per cent) of those surveyed felt that a failed merger had the highest risk of damaging a firm's reputation, way ahead of a failed investment in IT or an unsuccessful team move.
Gus Sellitto, managing director of Byfield Consultancy, commented: 'Whatever growth strategy a law firm undertakes, it carries some risk to their reputation. And with the legal press, and others, closely scrutinising law firm growth initiatives, law firm leaders increasingly need to be aware of how much reputational risk - as well as financial - each strategy carries.
'Swimming too far into uncharted waters might be seen as a reputational risk too far, but clearly this report and the interviews we carried out for it show that simply treading water is no longer an option.'