Annual Survey of Irish Law Firms 2017/18
Disruptive Technology & Competition for Talent
Contents Introduction
2
Executive summary
3
Survey highlights
8
Outlook for the legal sector
10
Firm performance and key issues
15
People
21
Mergers & acquisitions
26
IT investment and cyber-security
30
Brexit: the uncertainty continues
36
Dublin professional practices team
43
Smith & Williamson Freaney Limited Authorised to carry on investment business by the Institute of Chartered Accountants in Ireland. A member of Nexia International.
Smith & Williamson Freaney Audit Company Registered to carry on audit work and authorised to carry on investment business by the Institute of Chartered Accountants in Ireland. A member of Nexia International.
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Smith & Williamson Investment Services Limited Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority in the UK, and regulated by the Central Bank of Ireland for conduct of business rules.
Introduction We are delighted to present our sixth Annual Smith & Williamson Irish Law Firm Survey. We also publish an annual survey of UK law firms.
Smith and Williamson has a heritage and expertise in accounting, tax and business services in Ireland stretching back to 1958 and since 2011 Smith & Williamson Investment Management provides a suite of investment management, banking and pension services in Ireland. The combination of accounting, tax and investment management services enable us to provide a unique offering in the Irish market place. The Annual Smith & Williamson Irish Law Firm Survey highlights our continuing commitment to and partnership with the legal sector in Ireland. The legal sector continues to be an extremely important growth area for Smith & Williamson. Our professional practices team provides specialist accounting, tax, advisory, mergers and acquisition and succession planning services to Irish legal firms and professionals. While our survey sees continuing positivity, confidence and growth in the legal sector over the last 12 months, the clouds of Brexit and international political uncertainty overhang Ireland and continue to have an impact on confidence looking forward. I wish to especially thank the partners in legal firms who gave their time and participated in the survey. I also thank Amárach Research for its work in conducting the research for this survey. I hope you enjoy our report, analysis and findings.
Paul Wyse Managing Director, Dublin Office
Survey methodology Our national survey was carried out through telephone interviews in September and October 2017 by Amárach Research. 115 law firms took part in the survey this year (107 in 2016). The survey seeks to review current attitudes, and enquire about key issues and market sentiment in the legal sector. Typically survey respondents are managing partners or a senior partner.
2
The Survey of Irish law firms 2017/2018 includes:
Respondents’ head office locations:
• 18 of the Top 20 Irish law firms • 19 mid-tier firms • 78 small firms
• 75 in Dublin • 40 outside Dublin
Smith & Williamson
Executive summary Continuing growth with some uncertainties persisting The Irish economy continued its strong growth this year supported by strong activity on the domestic side of the economy. There has been a broad based increase in employment which has supported an uplift in consumer spending. GDP growth is forecasted at an impressive 4.9% for 2017 and 3.9% for 2018 in the latest Central Bank of Ireland quarterly economic commentary. The outlook remains positive with the economy forecasted to continue to improve though some risks and uncertainties persist.
Paul Wyse
The legal sector continued to enjoy good growth in 2017. The risks and uncertainties caused by Brexit and the recently elected US President are however causes of concern
The outlook continues to be characterised by uncertainty in relation to Brexit and concerns arising from the comments of the American President, not least by the messages he puts on his Twitter account. His stated intent to reduce US corporate tax rates and change tax policies with regards to repatriation of profits and the recent moves away from agreements previously negotiated with other nations, are causes of concern. These issues have affected business confidence going forward. Whilst almost two in three firms (62%) saw that the business outlook for the legal sector in Ireland had improved over the last twelve months only 47% of law firms and 33% of the Top 20 firms believe the business outlook for the legal sector in Ireland will improve in the next 12 months.
Legal sector outlook in past 12 months 2015
2016
TOP 20 FIRMS
2017
2015
2016
2017
Improved
74%
55%
62%
100%
54%
61%
Remained stable
21%
37%
34%
0%
38%
33%
Deteriorated
5%
8%
4%
0%
8%
6%
Legal sector outlook in next 12 months
TOP 20 FIRMS
2015
2016
2017
2015
2016
2017
Improved
74%
52%
47%
100%
38%
33%
Remained stable
24%
40%
46%
0%
46%
61%
2%
8%
7%
0%
16%
6%
Deteriorated
Most firms identified the economy and maintaining profitability as key issues facing the legal sector over the next 12 months. Recruitment and retention of staff and Brexit are two key issues identified for the legal sector over the next twelve months by the Top 20 firms. Pressure on fees and cash flow pressures continue to be seen as issues for firms outside the Top 20. Technology is identified as a key factor impacting the legal profession over the next five years both to improve efficiencies and interaction with clients. The biggest challenge for the profession will be to prepare for the impact the next generation of new technologies will have. Changes are already happening and it is clear that technological advances will affect all aspects of law firms. It is anticipated that the pace of change will accelerate with these technological advances.
Survey of Irish law firms 2017/2018
3
Firm performance: continuing improvement This year’s survey shows continued improvement in trading conditions and many firms enjoying increased revenues and profits. •
67% of firms show increase in revenues
• • •
67% of respondent firms (78% of the Top 20) are showing an increase in revenues and almost one in two of those firms (47%) enjoying an increase in excess of 10%. Profits increased in 62% of firms surveyed (50% in Top 20 firms down from 62% in 2016). Almost half of these firms (44%) saw profits grow by more than 10% this year. This is contrasted by 9% of firms surveyed seeing a decrease in profits in the last 12 months.
More regional firms have increased revenues this year (65%) compared to 2016 (53%). Profits were up in 65% of regional firms which is a significant increase on the 47% reported in 2016. The recovery has now well and truly moved outside Dublin.
Revenue growth
ALL FIRMS 2016
2017
2016
2017
DUBLIN
REST OF COUNTRY
2017
2017
Increased
64%
67%
84%
78%
68%
65%
Remained the same
25%
27%
8%
17%
24%
33%
Decreased
9%
4%
8%
5%
5%
2%
Refused / Don't know
2%
2%
0%
0%
3%
0%
DUBLIN
REST OF COUNTRY
Profit growth Profits increased in 62% of firms
TOP 20 FIRMS
Increased
ALL FIRMS
TOP 20 FIRMS
2016
2017
2016
2017
2017
2017
57%
62%
62%
50%
60%
65%
Remained the same
27%
27%
23%
44%
28%
25%
Decreased
11%
9%
15%
6%
9%
8%
Refused / Don't know
5%
2%
0%
0%
3%
2%
Key issues: maintaining profitability in a competitive landscape Most firms (64%) report an increase in the levels of competitive pressure in the sector in the last year. Maintaining profitability, pressure on fees and managing cash flows remain the key issues for the sector over the next 12 months.
4
•
Maintaining profitability is seen by most firms (58%) as the biggest challenge facing them as a result of increased competition, fee pressures and increasing salary and operating costs.
•
Managing cash flows is expected to continue to present issues for many firms (51%) as debtors and work in progress, increase as a result of higher revenues.
•
While overall the outlook was positive, the economy was identified by almost half of respondents as a key area of concern over the next 12 months. These relate to mainly external factors such as Brexit and wider global political uncertainties
Smith & Williamson
Actions taken by firms to improve performance In the face of growing pressures on profits, due to increasing staff costs and continuing pressures of fees, law firms are looking at technology to improve efficiencies. Most firms, 70% (78% of Top 20 firms) have made changes to business processes to improve their efficiency, with many firms investing in technology to improve their processes and reduce their operating costs.
70% made changes to business processes to improve efficiency
Firms are continuing to invest to grow revenues and market share. A more strategic approach to business development and brand differentiation is now required to make progress in a very competitive marketplace. As a result 70% of firms have continued to increase sales and marketing efforts (100% of the Top 20 firms) in the last 12 months. Many firms have targeted new markets (61% overall and 94% of the Top 20 firms) or introduced new services (45% overall and 67% of the Top 20 firms). While many firms have reduced or agreed to more fixed fees for certain work (53%) it is noteworthy that with growth in the economy and increases in salary and operating costs, over two in three of the firms surveyed (66%) have increased their fees in 2017.
Opportunities identified by firms The opportunities most identified by firms over the next two to three years were: focus on specialist sectors 57% and investment in technology 49%. Top 20 firms identified lateral hires (55%) as one of their preferred growth strategies while smaller firms identified expansion in Ireland as an opportunity for them. Almost one in two of all firms sees investment in training as a key strategy for opportunities going forward which is substantially up on last year’s one in four firms.
Most Top 20 firms increased staff numbers again this year
People: opportunities for all levels The constant challenge of optimal resourcing and retaining and recruiting talent continues unabated for most firms, particularly in Dublin. Most of the Top 20 firms (89%) surveyed have increased staff numbers this year, as did half of all firms (51%). Similar numbers of firms expect their staff numbers to increase in 2018. 37% of firms outside Dublin increased staff numbers where most firms are smaller, which is up on last year’s figure of 28%.
Staff numbers
67% of Top 20 firms see recruitment and retention as key issues
ALL FIRMS
TOP 20 FIRMS
DUBLIN
REST OF COUNTRY
2016
2017
2016
2017
2017
2017
Increased
48%
51%
92%
89%
58%
37%
Remained the same
48%
40%
8%
11%
33%
55%
Decreased
4%
9%
0%
0%
9%
8%
The increase in staffing levels means competition for talent continues to be a major challenge for firms. The recruitment and retention of staff is identified again in our survey this year as increasingly presenting difficulties for the sector. It remains a key issue, according to 43% of all firms surveyed and for 67% of the Top 20 firms over the next 12 months.
Survey of Irish law firms 2017/2018
5
Reward
€ 63% of firms reported pay increases of greater than 3%
Finding and retaining the right people is seen as a key challenge by firms. This is recognised in the increasing importance of both financial and non-financial rewards in attracting talented people. Flexible working arrangements and benefits are seen by more than half of the firms surveyed (53%) and most of the Top 20 firms, as a key factor for the profession in the next five years. Identifying the reward and retention mechanisms that employees value most will continue to be essential for firms to continue their growth. Partner remuneration is a key part of any firm’s strategy to retain its talent. Our survey shows a continuing movement to more performance related rewards taking in a number of measures to assess performance in distributing profits in firms.
In the last 12 months: • • • • •
Almost two in three firms (63%) reported pay increases of 3%+ (89% of Top 20 firms). More than one in two of the Top 20 firms (56%) paid increases of more than 5% (40% of all firms). A significantly lower number of smaller firms (17%) made no pay increases compared to the 39% reported in 2016. For firms outside Dublin, 32% made no pay increases (compared to 69% in 2016) 44% of firms outside Dublin increased pay by more than 3%.
IT: continued investment while cyber-attacks continue to increase Technological advances continue to accelerate in the legal sector. Firms need to prepare for the impact that these new technologies will have on all aspects of their operations, some of which will be disruptive. Investing in new technologies will be a key issue over the next five years. IT spend has increased again this year and is now running at c. 6.1% (up from 5.6% in 2016) of turnover including IT staffing costs in Top 20 firms (5.1% for all firms). For many firms investing in technology is seen as the key to gaining a competitive edge by streamlining operations and enhancing client service. Almost one in two firms updated/improved their IT systems in the last 12 months with a further 17% stating that they see this as an i mmediate priority. 61% of Top 20 firms reported cyber-attacks
Firms identified that the use of technology, (a) to manage their firm (81%) and (b) to interact with clients (76%), will have a significant impact on the legal profession over the next five years. The advent of AI technology represents a major challenge and opportunity for law firms well beyond the simple periodic update. Cyber-attacks are a continuing increasing threat to all law firms. Cyber-security is seen as the most serious technology challenge for firms, with malware, phishing and people related security issues cited as their biggest concerns. There has been a significant 60% increase in cyber-attacks reported in this year’s survey for Top 20 firms with 61% reporting that they were subject to such attacks in the last twelve months, up from 38% last year. There has also been a 17% increase in cyber-attacks reported by all firms, up to 34% from 29% in 2016.
6
Smith & Williamson
Brexit: the uncertainty continues A lot has been written about Brexit since our last survey. There is no doubt that Brexit will impact the Irish economy. Much uncertainty continues about the terms of the UK’s exit from the EU. We will therefore not be able to gauge its impact until the final terms become clearer. In spite of Article 50 being exercised by the UK, in March, the Irish and UK economies have both continued their upward growth spiral in the last 12 months.
61% of Top 20 firms suggested Brexit is a key issue for the legal sector
Most of the Top 20 firms have examined the implications of Brexit for them and have put in place strategic plans to deal with it. Very few firms outside the Top 20 have put such plans in place (3%). It is also noteworthy that only 23% of firms surveyed in our annual UK law firm survey this year have such plans in place. Many UK firms appear to be holding off on making substantive changes to their operations until there is more clarity. 61% of the Top 20 firms surveyed have suggested that Brexit is a key issue for the legal sector over the next 12 months. They see Brexit as an opportunity to grow their client base but also as a threat to their existing client base. The Law Society has reported that over 1000 solicitors from the UK have now registered with them since the Brexit referendum in June 2016. 89% of firms surveyed expect more UK firms to open offices in Dublin as a result of Brexit and anticipate the entry of these firms as the main source of competition over the next three years for legal firms in Ireland. We have seen some UK firms set up greenfield operations on a small scale in the last twelve months such as; Kermans, Simmons & Simmons and Pinsent Masons. It is also noteworthy that almost half (44%) of the Top 20 firms surveyed have been approached by a UK law firm in the last 12 months with a view to merger or acquisition or a strategic representation arrangement.
Mergers & Acquisitions - Brexit anticipated to increase M&A activity The growth of most legal firms in Ireland continues to be organic, supplemented by lateral hires as against M&A transactions. Our survey findings again highlight the focus by Irish law firms on seeking to acquire teams or individual lateral hires to expand or strengthen their services offering to clients. Almost one in two law firms surveyed made lateral hires in the last year. Most of the Top 20 firms have taken on lateral hires from other firms in the last year with 67% taking on more than four. 44% of Top 20 firms have been approached by a UK law firm since Brexit
Survey of Irish law firms 2017/2018
Almost one in two respondent firms have been approached over the last two years for merger discussions. It is however more noteworthy that almost one in two Top 20 firms have been approached by UK law firms in the last 12 months. Most firms anticipate an increase in M&A activity in the legal sector with the introduction of LLP’s and as a result of Brexit.
7
Survey highlights Firms continue to enjoy strong growth with almost two in three firms seeing profit and revenue increases over the last year.
+10%
One in two of such firms enjoyed profit and revenue growth in excess of 10% over the last year.
Confidence in the business outlook for the legal sector for 2018 continues to be impacted by Brexit and political uncertainties.
Key issues for the sector continue to be Maintaining Profitability, Pressure on Fees, Managing Cash flows and Recruitment and Retention.
One in two firms increased their staff numbers in 2017 (almost all Top 20 firms)
Two in three firms awarded pay increases of more than 3% with 40% (56% of Top 20 firms) increasing pay by more than 5% in the last year.
Most Top 20 firms have prepared a Brexit strategy and have started to execute it. Only 3% of non-Top 20 Firms have a Brexit strategy prepared.
Some of the larger UK law firms have started to open small greenfield operations in Dublin.
8
Smith & Williamson
44% of the Top 20 firms have been approached by a UK law firm in the last 12 months with a view to a merger or acquisition/strategic representation arrangement.
An increasing number of firms have added lock-up management to performance objective criteria and reward for partners.
Lateral hires continue to be an area of focus for Top 20 firms, with two in three making more than four lateral hires last year and over 20% making more than ten. Recruitment and retention continue to be key issues for firms.
Firms see investing in technology and focusing on specialist sectors as the main opportunities for them over the next few years.
Nearly one in two firms (43%) updated/improved their IT systems in the last 12 months and a further 17% of firms see this as an immediate priority.
Most firms (70%) see cyber-attacks as their biggest technology risk. Cyber-attacks continue to increase with a massive increase in the number of Top 20 firms reporting such attacks this year, 61% up from 38% in 2016. One in three firms (34% up from 29% in 2016) reported cyber-attacks in this year’s survey.
41 % of firms subject to a cyber-attack suffered some down time as a result. Only 9% of Top 20 firms, where attacks were more prevalent, suffered some down time.
Outlook for the legal sector
Smith & Williamson
Outlook for the legal sector The economy The economic backdrop has continued to be broadly positive with anticipated GDP growth of 4.9% for 2017 (2016: 5.1%) and projected growth of 3.9% for 2018 outlined in the latest Central Bank of Ireland Quarterly Bulletin. The labour market is also performing well as unemployment is expected to average 6.2% in 2017 and 5.6% in 2018, with the Central Bank of the view that there is still scope for the rate to fall further. Inflation remains low at 0.3% and only a marginal increase is predicted for 2018 to 0.7%. However, it should be noted that these rates are the result of the net effect of an increase in the cost of services being balanced by a decrease in the cost of goods.
Stephen Scott
While economic growth is predicted to be relatively strong, continuing economic and political uncertainty make it difficult to predict the economic outlook over the medium term with any degree of confidence.
This positive outlook is tempered somewhat by variances across sectors and geographically. Additionally, there is still considerable economic and political uncertainty, with little further clarity in relation to the matters outlined in last year’s survey such as:
•
Brexit: Article 50 was triggered on 29 March 2017 starting the two year countdown to exit. Over six months later little progress has been made in relation to the EU pre-conditions, let alone the substantive trade talks, nor on any transitionary arrangements that are likely to be required if a “hard Brexit” is to be avoided.
•
Sterling: The most direct impact of the continuing Brexit uncertainty is the weakness of sterling with some economic commentators predicting a drift beyond a €/£ rate of £0.90 towards parity through 2018.
•
Corporation tax: It appears that the EU, led by France and Germany, will again be prioritising the goal of increased fiscal convergence and separate pressure may be exerted on Ireland from across the Atlantic.
•
Political uncertainty: The timing of the next general election in Ireland is still the subject of much conjecture and internationally, the future actions of the Trump administration, the proposed Macron reforms in France, instability in Spain, and the post-election coalition governments in Germany and Italy, will all be closely monitored.
Outlook for the sector Most firms (62%) reported that the business outlook for the legal sector had improved in the last twelve months. However, there continues to be a declining number of firms expecting the outlook to improve over the next twelve months, with only 47% of all firms (52% in 2016) and only 33% (38% in 2016) of the Top 20 firms. Firms report that competitive pressure in the sector continues to increase.
Survey of Irish law firms 2017/2018
11
Legal sector outlook all firms Outlook All Firms Last 12 Months
Outlook All Firms Next 12 Months
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2013
2014
2015
2016
2013
2017
2014
Improved
2015
Stable
2016
2017
Deteriorated
Legal sector outlook Top 20 firms Outlook Top 20 Firms Last 12 Months
Outlook Top 20 Firms Next 12 Months
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2014
2015
2016
2017
2014
2015
Improved
2016
Stable
2017
Deteriorated
Overall, 2017 has seen a marginal improvement in the business outlook for the legal sector. Looking ahead to 2018, there is a marginal reduction in confidence with 47% of firms suggesting an improvement, as opposed to 52% in 2016. This has continued a pattern over the last number of years, with a significant percentage of those who expressed an “improved” outlook previously now switching to “remain stable”. The larger firms have a more pessimistic outlook, perhaps linked to their more international perspective. Top 20 firms expressing a “remain stable” view (61%) now significantly outnumber those who have maintained the position that the business outlook will improve (33%).
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Smith & Williamson
Key issues facing the legal sector for the next 12 months ALL FIRMS
TOP 20 FIRMS
DUBLIN
REST OF COUNTRY
2017
2017
2017
2017
Maintaining profitability
58%
50%
61%
53%
Managing cash flow
49%
17%
47%
53%
Pressure on fees
49%
22%
42%
63%
Economy
45%
72%
43%
50%
Recruitment and retention of staff
43%
67%
51%
26%
Brexit
30%
61%
30%
29%
Maintaining profitability continues to be a key issue facing legal firms in the next 12 months. Managing cash flow, pressure on fees, the economy and recruitment and retention of staff all continue to feature as key issues for the sector. The main variances between the Top 20 responses and those of all firms relate to Brexit, the economy and recruitment and retention of staff, where the large firms see these issues having more of an impact on the sector. Managing cash flow and pressure on fees are seen as more important issues for those outside the Top 20. This suggests that the Top 20 firms are facing less fee pressures as work levels and revenues increase. Firms outside Dublin appear to be facing more fee pressure than their Dublin counterparts with 63% outlining this as a key issue for the sector as opposed to 42% in Dublin. Recruitment and retention of staff is a much more significant issue in Dublin at 51% as opposed to 26% in other parts of the country.
Significant issues for the legal sector over the next five years Technological disruptions and challenges are the most significant issues for the legal sector over the next five years. With growing pressures on fees, profits, staff costs and retaining key talent, firms need to focus on improving process efficiencies using new technologies. Technologies that help improve the ratio of fee earners to non-fee earners to increase profitability will also be critical. Firms will need to continue to address the increasing cyber threats and risks and invest in their IT security defence and business continuity plans.
Survey of Irish law firms 2017/2018
13
Significant issues for the legal sector over the next five years
90% 80% 70% 60% 50% 40% 30% 20% 10% 0%
Changing fee structures
2015
Changing reward structures
2016
2017
Flexible working
Firm technology
Technology to interact with clients
Marketing and brand development
Brexit
Top 20 Firms 2017
The top two key issues identified that will impact the legal profession over the next five years both relate to the use of technology, whether internally (81%) in the management of the firm to increase efficiency and reduce costs, or externally (76%) for managing and improving interactions with clients and other third parties. Marketing and brand development (71%) and changing fee structures (71%) are next most important, with Brexit (66%) completing the top five issues for all firms. Flexible working arrangements are increasingly a key issue for the profession, as identified by 53% of respondents up from 40% in 2016. Agility is becoming more important for firms for resource planning and people management. The stand-out issues identified by the Top 20 firms for the legal sector over the next five years are Brexit and technology. This is unsurprising, given the larger firms more international perspective and stated objective to improve process efficiencies. Having more adaptable and flexible working arrangements are seen as issues for Top 20 firms in recruiting and retaining talent.
14
Smith & Williamson
Firm performance and key issues
Firm performance and key issues The strong GDP growth in 2017 and forecasted for 2018 is mirrored in the fortunes of the legal sector. The results of our survey continue the trend of recent years with most firms enjoying improved results in the last 12 months and forecasting better results in the coming year. The results are consistent with last year with 62% of firms surveyed (63% in 2016) reporting an improved outlook for their business in the last 12 months. Furthermore, 55% (58% in 2016) are expecting an improved outlook in the next 12 months. It is also noteworthy that regional practices reported more improvement over the last twelve months than Dublin firms, clearly indicating that the recovery and growth are finally reaching the regions.
Dan Holland
Most firms continued to enjoy revenue and profit growth in the past 12 months
Firm outlook in past 12 months TOP 20 FIRMS
ALL FIRMS
DUBLIN
REST OF COUNTRY
2016
2017
2016
2017
2017
2017
Improved
63%
62%
69%
72%
58%
68%
Remained stable
36%
37%
31%
28%
42%
29%
Deteriorated
1%
1%
0%
0%
0%
3%
DUBLIN
REST OF COUNTRY
Firm outlook in next 12 months ALL FIRMS
TOP 20 FIRMS
2016
2017
2016
2017
2017
2017
Improved
58%
55%
62%
67%
57%
50%
Remained stable
41%
43%
38%
33%
42%
47%
Deteriorated
1%
2%
0%
0%
1%
3%
Revenues and profits The continuing improvement in trading conditions has resulted in most firms (67%) enjoying increased revenues again in 2017 (78% of the Top 20). While the vast majority of the Top 20 firms report growth in revenues in 2017, the number reporting an increase of greater than 10% has dropped to 28% from 82% in 2016. Interestingly, almost one in two of the non-Top 20 Firms enjoying an increase of revenues last year saw increases of more than 10% in revenues in the last 12 months. Profits are up in 62% of firms surveyed (57% in 2016) and 50% of the Top 20 (62% in 2016). Within the Top 20 firms enjoying profit increases, more than one in two (55%) report a profit increase of greater than 10%. This is significantly down on last year’s 87%. Outside Dublin, 65% of firms saw revenues increase in the last twelve months, up from 53% in 2016. Profits increased in 65% of regional firms, also significantly up on the 47% in 2016.
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Smith & Williamson
Firm revenues in past 12 months €
67% of firms (78% of Top 20 firms) reported increased revenues
TOP 20 FIRMS
2016
2017
2016
2017
Increased
64%
67%
84%
78%
€
€
ALL FIRMS
Remained the same
25%
27%
8%
17%
Decreased
9%
4%
8%
5%
Don’t know
2%
2%
0%
0%
Firm profits in past 12 months
ALL FIRMS
TOP 20 FIRMS
2016
2017
2016
2017
Increased
57%
62%
62%
50%
Remained the same
27%
27%
23%
44%
Decreased
11%
9%
15%
6%
Refused
5%
2%
0%
0%
Percentage growth in revenue in last 12 months ALL FIRMS
TOP 20 FIRMS
2016
2017
2016
2017
1%-5%
19%
18%
9%
21%
6%-10%
26%
34%
9%
51%
11%-20%
37%
34%
73%
21%
20%+
13%
13%
9%
7%
No response
5%
1%
0%
0%
Percentage growth in profits in last 12 months ALL FIRMS
62% of firms (50% of Top 20 firms) enjoyed profit increases
TOP 20 FIRMS
2016
2017
2016
2017
1%-5%
23%
24%
0%
22%
6%-10%
26%
30%
13%
11%
11%-20%
26%
34%
63%
33%
20%+
18%
10%
24%
22%
No response
7%
2%
0%
12%
Areas of practice growth Property/Conveyancing, Litigation and Corporate/Commercial continue to be the principal practice areas driving growth in many firms. Larger firms report continuing significant growth across most practice areas over the last 12 months, with an expectation that most areas will perform strongly in 2018. Unsurprisingly there is a continuing trend of an expected reduction in activity in services, such as debt recovery and insolvency. With the pending new General Data Protection Regulation, almost two out of three Top 20 firms, expect the area of Privacy and Data Security to be a growth service in the coming 12 months.
Survey of Irish law firms 2017/2018
17
Business opportunities The business opportunities identified as drivers of growth by firms over the next three years remain consistent with the findings in last year’s survey, being; focusing on specialist sectors, and investment in technology. For Top 20 firms, lateral hires continue to be seen as a key area of opportunity.
Main areas of opportunity over the next three years ALL FIRMS
TOP 20 FIRMS
2017
2017
Lateral Hires
24%
55%
Expansion in Ireland
44%
33%
Overseas Expansion
10%
28%
Investment in Technology
49%
56%
Investment in Training
45%
45%
Focus on Specialist Sectors
57%
50%
Business Development and Marketing
39%
28%
Sources of competition for firms For the first time, in our 2017 survey, we asked firms to set out the main potential sources of competition over the next three years. The Top 20 firms have a very clear view, with 86% citing UK legal firm expansion into Ireland as the main potential source of competition. The Top 20 firms are also concerned by the expansion of international firms into Ireland and the increase of in-house legal expertise within their clients. 74% of firms identified niche legal firms as the main potential source of competition in the coming years.
Main potential sources of competition over the next three years
86% of Top 20 firms see UK firms as competition in the future
ALL FIRMS
TOP 20 FIRMS
2017
2017
UK Firms
49%
86%
International Firms
21%
58%
Niche Firms
74%
41%
Online Service Providers
47%
6%
Clients’ In-house Resources
65%
80%
Key issues for firms Revenue and profitability growth was achieved by most firms in 2017 and continued growth is forecast for 2018. In order to maximise their growth, firms need to remain vigilant to the key commercial challenges. The issues which had the most significant impact on firms in the past 12 months were consistent with our 2016 law firm survey, being; downward pressure on fees, cash flow pressures, increased operating costs, attracting/retaining talented professionals and increased competition. Looking forward, the main challenges identified by firms are the economy (36%), recruitment and retention of staff (44%) and maintaining profitability (43%).
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Smith & Williamson
Top three key issues facing your firm over the next two to three years ALL FIRMS
TOP 20 FIRMS
2017
Top 20
Economy
36%
50%
Recruitment & Retention of Staff
44%
61%
Maintaining Profitability
43%
40%
Managing Cash Flow
37%
6%
Pressure on Fees
38%
16%
Actions taken by firms to improve performance The actions taken by firms over the past 12 months to improve performance are consistent with the 2016 survey, with the main actions being: increased sales and marketing efforts, changed business processes to become more efficient, targeted new markets and increased fee levels. 70% made changes to business processes to improve efficiency
The Top 20 implemented similar actions though a greater number, almost three in four compared with one in two in 2016, increased fee levels.
Actions taken by law firms to improve performance ALL FIRMS
70% have continued to increase sales and marketing efforts
â‚Ź
66% of firms have increased fees
TOP 20 FIRMS
2016
2017
2016
2017
Increased fees
52%
66%
54%
72%
Increased sales/marketing efforts
74%
70%
92%
100%
Discounted/reduced fees/agreed to more fixed fees
52%
53%
62%
72%
Reduced operating costs
42%
37%
31%
39%
Engaged professional advisors/third party support
48%
49%
77%
50%
Targeted new markets
53%
61%
92%
94%
Introduced new services
36%
45%
69%
67%
Changed business process(es) to be more efficient
74%
70%
77%
78%
Working capital and lock-up The requirement for capital in firms continues to increase with rising staff costs, investment in technology, IT security and increasing lock-up as revenues improve all of which require additional funding. Working capital management through effective management of lockup (combined debtors and work-in progress) is always a challenge for professional service firms, and legal firms are no different. Central to effective lock-up management is instilling personal responsibility at partner or fee-earner level. There has undoubtedly been a greater level of focus on lock-up management within legal firms in recent years, including introducing a number of measures to make improvements. In the past 12 months, legal firms have specifically focused on developing an enhanced credit control function (59%), training of partners/ fee earners (54%), improved quality of information available (52%) and formally linking lock-up performance to performance assessment. Some of these measures have been embraced even more by the Top 20 firms, with 89% training partners or fee-earners and 78% formally linking lock-up performance to performance assessment.
Survey of Irish law firms 2017/2018
19
Working capital days tied up in debtors and work in progress ALL FIRMS DEBTORS 2016
WORK IN PROGRESS 2017
2016
2017
TOTAL 2016
2017
Up to 30 days
26%
28%
11%
13%
37%
41%
31-60 days
25%
27%
13%
20%
38%
47%
61-90 days
24%
23%
20%
14%
44%
37%
91-120 days
7%
10%
14%
19%
21%
29%
121+ days
7%
4%
29%
24%
36%
28%
Don’t know
11%
8%
13%
10%
24%
18%
TOP 20 FIRMS DEBTORS
WORK IN PROGRESS
TOTAL
2016
2017
2016
2017
2016
2017
Up to 30 days
8%
0%
0%
0%
8%
0%
31-60 days
15%
11%
23%
6%
38%
17%
61-90 days
77%
61%
31%
44%
108%
105%
91-120 days
0%
22%
31%
28%
31%
50%
121+ days
0%
0%
15%
11%
15%
11%
Don’t know
0%
6%
0%
11%
0%
17%
Have the extra efforts to improve lock-up been successful in the past 12 months and are firms reporting lock-up improvements? The lock-up profile of firms is similar to that in 2016 and it appears the additional efforts have yet to result in tangible lock-up improvements. Consistent revenue growth does create more lock-up management administration and no evidence of increasing lock-up during a cycle of revenue growth can be viewed as somewhat of a success. There has, however, been some debtor day creep reported by the Top 20 firms, with almost one in four (22%), compared with none in 2016, having an aged debtor profile of between 91 and 120 days.
Our View It can be difficult to assess the lock-up management profile across the legal sector due to the differing practices and policies within firms regarding the method and timing of recording work in progress on client ledgers. Firms need to ensure they have firm wide policies regarding time recording, work in progress and debtor management which are adhered to by all partners and fee earners. Almost all firms are predicting continued revenue growth in 2018 which will create additional lock-up management challenges. Cash flow pressure on firms may be reducing at present as economic growth continues but all firms need to have appropriate lock-up management policies in place to protect against any future decline in economic activity. What is certain is delays in converting lock-up into cash receipts will necessitate more partner capital or bank funding to finance working capital.
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People
People According to the latest Law Society Annual Report (2016), there are 10,349 practising solicitors, up 6% from 2016, of which 20% are employed in the Top 20 firms. A further 20% of practicing solicitors are in-house or public sector solicitors. According to the Law Society, 80% of in-house solicitor roles are based in Dublin. In 2007, in-house solicitors represented 12% of the profession and this figure now stands at 20%. The working arrangements for in-house solicitors are increasingly attracting more lawyers and pay is not the key criteria for this choice. This is putting increased pressure on law firms and how they attract and retain key staff.
Ă ine Reidy
With almost 40% of solicitors aged 39 or less, people development is a key issue for the sector. Top tier firms have confidence in their systems of identification and development of talent and have identified reward mechanisms to attract and retain talent.
Staff recruitment and retention
Many firms anticipate significantly increased flexible working conditions as a key tool to attract and ultimately retain talent.
Firms need to consider their staffing requirements carefully and give potential recruits clear and compelling reasons to join and remain with them. This is not just about pay. It is about the working culture of the firm having a clear path to career development, including a roadmap to partnership, for those that merit it, and a rewarding and fulfilling career for those with different career aspirations. In the contemporary marketplace it may become necessary to augment the traditional methods of recruitment with a more modern approach which optimises the pathways of influence to potential employees, that emerging technologies are providing. The recruitment and retention of staff remains a key issue for all professional firms. Sourcing, hiring, training, developing and retaining quality individuals is the key to survival, future growth and success. Recruitment and retention within the sector clearly remains a key issue in the short term. The Top 20 firms rank recruitment and retention as one of the most significant issues facing the sector. Respondents anticipate that more UK firms will look to establish a presence in Ireland post-Brexit, either through M&A or greenfield set ups. Some UK-based firms will be seeking a foothold in the Irish market whilst others will be looking to hire and scale very quickly. It is expected that the competition for talented staff will therefore continue to increase. Further lateral hires can be anticipated as most top UK and Irish law firms see this as a key opportunity for them for business expansion. Firms need to identify people at risk of leaving at all levels as recruitment is a costly exercise. Open, honest and regular reviews and communication with staff should help. High staff morale and good working culture are strong ingredients in retaining staff.
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Smith & Williamson
Staff numbers Staff numbers continue to increase in most of the Top 20 firms (89%) and in many Dublin firms (58%), with a lower percentage of firms outside Dublin (37%) reporting increases. More firms are reporting vacancies this year (52%) with more trainees being taken on. However, it is noteworthy that, notwithstanding the increased demand for staff, the numbers retained by firms post-qualification are not reported as increasing. The numbers of newly qualified solicitors leaving Ireland to work in the London market has decreased in the last 12 months. In the past it was generally anticipated that one in five newly qualified solicitors from the Top 20 firms left Ireland to work in London. This appears to no longer be the case. Most Top 20 firms increased staff numbers again this year
Trainees The numbers hired by firms at a graduate or newly qualified level can often be seen as an indicator of a successful law firm. Over the past 12 months 35% of all firms reported increasing trainee numbers in 2017 compared to 25% in 2016. Some 40% of these firms reporting such increases are located in Dublin with 24% relating to firms outside of Dublin. Most Top 20 firms (72%) however increased their trainee headcount, with the remainder keeping their intake the same over the previous 12 month period. Looking ahead, a similar picture emerges with 38% of all firms overall expecting to increase trainee intake in 2018 compared to 29% in 2016.
Vacancies 52% of firms report having vacancies in 2017, which is an increase from the reported figure of 40% of respondents in 2016. Most of the Top 20 firms report that they have vacancies currently. It is clear that there is a gap in the ready availability of talent to fill these roles. Interestingly, the retention of graduates post qualification has decreased with only 23% of all firms noting an increase in retention at this level compared to 26% in 2016.
Pay Pay increases in the sector continue to outstrip inflation. The key issues of staff recruitment and retention, as well as lateral hire strategies being pursued by firms in addition to their increasing workloads continues to put pressure on pay levels across the profession.
€ 63% of firms reported pay increases of greater than 3%
The significant upward trend in salary increases continues to be reported in this year’s survey results. Most firms (63%) implemented salary increases of more than 3% compared to 35% of firms offering an increase at this level in 2016. Some 40% of firms implemented pay increases in excess of 5% this year up from 18% in the prior year. Only 17% of firms noted no pay increases in the last 12 months compared to 39% in 2016. Most Top 20 firms reported salary increases of 3%+ in the past 12 months and more than one in two (56%) had salary increases in excess of 5% (46% in 2016). Whilst the Top 20 firms commenced salary increases a number of years ago, the mid-tier and smaller firms are now being forced to ‘catch up’ in what is now a candidate-driven market.
Survey of Irish law firms 2017/2018
23
Two in three regional firms paid salary increases this year as against the 69% that did not in 2016. Indeed, 39% of regional firms paid increases in excess of 3% compared to 19% last year. Pay pressures are now evident throughout the country.
Pay Increases
ALL FIRMS 2014
2015
2016
2017
None
56%
36%
39%
17%
1%-3%
5%
10%
9%
16%
3.01%-5%
8%
20%
17%
23%
5.01%+
27%
29%
18%
40%
No response
4%
5%
6%
4%
Pay Increases
TOP 20 2014
2015
2016
2017
None
19%
0%
0%
0%
1%-3%
19%
13%
0%
6%
3.01%-5%
56%
20%
38%
33%
5.01%+
6%
67%
46%
56%
No response
0%
0%
16%
5%
Pay Increases
DUBLIN
REST OF COUNTRY
2016
2017
2016
2017
None
24%
10%
69%
32%
1%-3%
10%
13%
8%
21%
3.01%-5%
21%
25%
8%
21%
5.01%+
38%
34%
11%
18%
No response
7%
4%
4%
3%
Reward mechanisms: the future Firms are reporting the requirement for increased innovation in reward mechanisms to attract and retain talent that are no longer solely cash based. As a result, firms are looking to apply a range of mechanisms to address employee needs and aspirations. Our survey respondents indicate the leading reward firms will be implementing over the coming three years is flexible working (43% of all firms, 78% of Top 20 firms). The Top 20 firms report less pressure to increase cash based financial reward as a mechanism of attracting and retaining talent when compared to the increased requirements of staff for flexible working conditions.
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Smith & Williamson
This is consistent with our market knowledge of the larger firms offering incentives such as ‘school term’ working hours to partners and key staff, working from home flexibility and/ or sabbaticals. It appears that unpaid leave (39%) and sabbaticals (44%) are more likely to be a bigger part of the reward mechanisms in Top 20 firms in the future. Flexible working arrangements are increasingly attractive to lawyers at all levels. Research by consultancy Timewise shows that both men and women are equally keen to have more control over their working hours. This can be a challenge for many law firms and clients accustomed to on-tap access to professionals. Flexible working requires careful thought in how it is applied firm-wide, including the setting of clear policies.
Reward mechanisms increasingly being used by firms ALL FIRMS
78% of Top 20 firms are increasing the use of flexible working
TOP 20
2016
2017
2016
2017
Sabbaticals
14%
17%
38%
44%
Unpaid leave
24%
26%
54%
39%
Flexible working
45%
43%
77%
78%
Cash-based financial rewards
42%
47%
62%
72%
Flexible benefits
34%
39%
69%
72%
The reward mechanism used for the partner group has changed in recent years with the move away from the more traditional measures of equal share for all partners to a merit based award structure. Performance related reward is becoming an increasing aspect in the distribution of profits in firms with more measures to assess performance being introduced by firms. A decreasing number of firms (27%) reported ‘equal share for all partners’ as a reward mechanism compared to 40% in 2016 and 2015. Only 6% of the Top 20 firms reported using the same method of reward across the partner group.
Principle measures of Partner performance ALL FIRMS
TOP 20
2016
2017
2016
2017
Recovery of fees
60%
63%
62%
67%
Client retention
45%
46%
46%
33%
New business won
50%
38%
69%
50%
Billed time/value
34%
38%
31%
56%
Business development
16%
26%
38%
39%
Chargeable time
17%
23%
15%
22%
Most firms (63%) noted that one of the principle measures used by them in assessing partner performance is in relation to their performance in the recovery of fees. Client retention, new business won and value of billed time follow as being the next most used measures of performance.
Survey of Irish law firms 2017/2018
25
Mergers & acquisitions
26
Smith & Williamson
Mergers & acquisitions There have been very few significant mergers in the Irish legal sector over the last five years. The growth of most legal firms has been mainly organic, supplemented by lateral hires. Rather than merging with another firm, lateral team hires are more frequently used in the Irish marketplace to strengthen a core practice area and/or expand the service offering of a firm. This is also a more immediate approach than to have to invest resources and develop the skill-sets by a firm on its own to tackle a particular sector, a new market segment or area of law. Most firms holding merger discussions fail to complete. The reality is when trying to bring together different firms and cultures, the challenges are immense, not least that many partners are also risk-averse.
Paul Wyse
Survey results Lateral hires
Brexit and the adoption of LLP structures are anticipated to result in an increase in UK firms merger and acquisition activity in Ireland.
Many firms expand their business and introduce new service lines through lateral hires. Most of the Top 20 firms surveyed (67%) took on more than four lateral hires in the past year (77% in 2016) and 22% took on more than ten. More than one in two (55%) of the Top 20 firms surveyed see lateral hires as one of the biggest opportunities for their firms over the next three years. For firms outside the Top 20 it is more usual to see such hire numbers in the range between one and three and there has been a noticeable increase in this activity, by such firms, in this range up from 24% to 35% of firms year on year.
How many lateral hires has your firm recruited in the past year?
100%
No response More than 10
80%
6-10 people
60%
4-5 people 1-3 people
40%
None
20% 0% 2016
2017 All Firms
Survey of Irish law firms 2017/2018
2016
2017
Top 20 Firms
27
Merger activity and discussions The level of merger activity is expected by most respondent firms to increase over the next year. The level of discussions initiated by firms with a view to a potential merger or team acquisition in the last two years has increased slightly with 30% of firms and 33% of the Top 20 firms initiating such discussions. Whilst there are more discussions and approaches, most of these fail to complete and firms as a result are more inclined to lateral hire strategies to achieve growth ambitions.
44% of Top 20 firms have been approached by a UK law firm
The number of firms who have been approached with a view to a potential merger or team acquisition in the last two years continues to increase at 43% (40% 2016). The number of Top 20 firms approached is higher at 56% (albeit lower than the 69% in 2016). It is noteworthy that 44% of the Top 20 firms have been approached by a UK law firm in the last 12 months, primarily as a result of Brexit.
Expectations on levels of merger activity
ALL FIRMS
TOP 20
2016
2017
2016
2017
Increase
59%
63%
62%
61%
Remain the same
35%
34%
31%
39%
Decrease
1%
1%
0%
0%
Refused/Don’t know (DNRO)
5%
2%
7%
0%
Firms that are considering a merger or acquisition have stated that their primary reasons for considering such a transaction are to increase their scale of operations (87%), to provide a more diversified range of services (61%), and to develop a new service delivery model (39%).
Has your firm been approached for a potential merger in the last two years? ALL FIRMS
TOP 20
2016
2017
2016
2017
Yes
40%
43%
69%
56%
No
60%
57%
31%
44%
Impact of Brexit Most firms surveyed expect more UK firms to open offices in Dublin and anticipate an increase in mergers or acquisitions by such firms in Ireland as a result of Brexit. It is noteworthy that 44% of the Top 20 firms surveyed (and 12% of non Top 20 firms) have been approached by a UK law firm in the last 12 months with a view to a merger or acquisition or a strategic representation arrangement. UK law firms that have set up, or are about to set up, greenfield offices in Dublin post-Brexit are, and will be, seeking to recruit talented partners and teams. It is inevitable that more lateral hires will result. This will lead to increased competition at all levels including post qualified and graduate levels and consequent potential salary inflation.
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Smith & Williamson
Limited liability partnerships The partnership business model has long been stated by law firms to restrict a firm’s ability to merge with or acquire other law firms. The New Legal Services Regulation Act allowed for the introduction of Limited Liability Partnerships (LLP’s). LLP’s will require authorisation and registration through the new Legal Services Authority. It is our view that the introduction of LLP’s will increase M&A activity in the sector over time. This is evidenced by the fact that there is more M&A activity prevalent in the UK market where the LLP business model has been available as a model for professional practices for many years and is widely used.
Our view For all the discussions taking place few mergers have occurred in the legal sector. Lawyers are trained to be risk averse and the partnership structure is a major obstacle. Trying to get all partners on board to agree to a transaction can be immensely difficult. The financial and cultural risks play into merger fears also. The legal sector is made up, in the main, of small legal firms, with more than 90% of firms having fewer than five solicitors. This prevailing practice structure suggests that most lawyers appear to prefer to be in control of their own destiny. Many in the professions put their clients first and their business strategy second. It is essential for partners to take time out, often with a trusted adviser, to review their objectives and the growth strategy and succession plans for their firms. Whilst mergers present many risks and obstacles they can deliver an immediate impetus to growth. For a merger to be successful there must be proper planning, due diligence and set objectives for the merged entity to achieve. Sufficient time must be given to merger objectives and identifying appropriate target firms with similar cultures and to integrate the merged practice if successful negotiations occur. Brexit and the introduction of LLP’s may well be a game changer and the needed catalyst to kickstart M&A activity in the Irish legal marketplace.
Survey of Irish law firms 2017/2018
29
IT investment and cyber-security
30
Smith & Williamson
IT investment and cyber-security Technological advances continue to accelerate. Preparing for the impact that technology will have in all aspects of law firm operations will be a key issue for firms over the next five years. Investment in technology is clearly central to law firms’ strategies with most firms continuing to invest in technology and reporting that IT investment remains an immediate or medium term priority. Top 20 firms continue to outspend the industry based on the percentage of turnover expended by them on IT.
Investment in IT
Marc Lowry
Investment in Technology to improve efficiencies in processes in firms and interaction with clients is seen by many firms as a key opportunity to progress in the marketplace.
Firms identified maintaining profitability as a key issue for them with rising staffing costs, fee pressures and increasing competition. Firms are focusing more on improving efficiencies by investing in IT. 60% of firms have updated or improved their current IT systems in the last 12 months or see it as an immediate priority. In 2017 firms spent on average 5.1% of their turnover annually on IT. Our survey finds however that the Top 20 firms continue to outspend the average significantly with their investment in IT running at an average of 6.1% of turnover. Looking at the opportunities that technology brings to the sector, almost one in two firms have expressed the desire and intent to leverage innovation to enhance the client experience and better manage workflows. Respondents to our survey have identified that the use of technology in managing their firm (81%) and to interact with clients (76%) will have a significant impact on the profession over the next five years. Most of the Top 20 firms do however see IT as a key issue for the sector. The advent of artificial intelligence (AI) technology represents a major challenge and opportunity for law firms, well beyond the simple periodic update of IT systems. Machine learning technology smart enough to use legal precedents, together with the next generation of online lawyers will pose new threats to the sector.
Outside the pale While 65% of Dublin firms updated/improved their current IT systems in the last 12 months or see this as an immediate priority, it was noteworthy that 53% of regional firms did so where there are many smaller firms operating. However, some regional firms see such investment as less of a priority going forward with nearly 1 in 5 of such firms not seeing it as a priority.
Survey of Irish law firms 2017/2018
31
Update or improving IT systems
60% 50% 40% 30% 20% 10% 0%
2016 2017 Top 20
Done in last 12 months
An immediate A medium term priority priority
A long term priority
Not a priority
The Top 20 firms remain focused on the necessity to upgrade and improve their IT systems as a strategic issue with 28% of the Top 20 firms reporting they have completed updating their systems over the last 12 months and a further 33% reporting such investment as an immediate priority. One in two firms outside the Top 20 have upgraded and improved their IT systems in the last 12 months with a further almost one in five seeing this as an immediate priority. It seems that whilst the firms outside the Top 20 which have been lagging behind the investments in IT made by the Top 20 firms in past years, they are now making such investments.
AI: the rise of the machines Artificial intelligence or AI is the simulation of human intelligence processes by computer systems and machines. These processes include learning, reasoning and self-correction by an iterative process. A 2013 Oxford University Study on the future of employment predicted that technology would displace 47% of jobs by 2034. But what of lawyers? The BBC has a predictive tool on their website based on the above study and predicts the likelihood of replacement of solicitors by a robot at only 3%. In 2016, 18 year old Joshua Browder launched the DoNotPay.co.uk website which allows motorists subject to a parking fine to pick one of 12 reasons of defence then enter the relevant details and send a custom-generated appeal created by the website’s algorithm to the local council in question. The chatbot app has helped quash over 160,000 parking fines in the UK and New York and over $4 million in fines! And all of this without a single lawyer in sight. It is likely in areas like this, where the law is formulaic, that apps and online tools will become more pervasive. It is easy, for example, to see applications that would test the validity of summonses based on a simple Q&A.
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Smith & Williamson
The anticipated acceleration of technological advances over the next five years represents a major challenge and opportunity for law firms. It will not only impact some traditional roles within the profession, but will change the type of talent that firms need to have at their disposal. IBM is reportedly working with several law firms to develop a range of applications for the profession. With the potential adoption of AI by larger firms, some are rightly concerned about the potential disruptive nature of such new technologies. Larger firms in the UK and in Ireland are already adopting new technology solutions producing significantly greater efficiency, lowering costs and giving them competitive advantage. Some of the mundane, time consuming and even boring routine tasks like research and discovery are being replaced or aided substantially with technological advances. There will still be a need for the human touch. Judgment and experience are part of it but imagination, creativity and emotional intelligence are things that machines can’t replace‌ just yet!
Biggest technology issues facing your firm ALL FIRMS
TOP 20
2017
2017
Document management
63%
44%
Enhancing the client experience
28%
50%
Cyber-security
70%
78%
Use of AI
7%
17%
Managing work-flows
24%
11%
Use of social media
17%
22%
Cyber-security Cyber-crime is now a fixture of the virtual landscape with new channels constantly being created to extort victims as quickly as defences are put in place. Our survey reveals that cyber-attacks on legal firms are up again in 2017 with a 23% increase in firms reporting that they have been subject to cyber-attacks. For the Top 20 firms there is a 60% increase in reporting such attacks. Technology brings opportunities and has become all pervasive in every day practice management and client interaction. Firms have become acutely aware of the associated risks. Cyber-security is seen as the most serious technology challenge for firms, with malware, phishing and people related security issues cited as their biggest concerns. This result ties in with similar results from our survey of UK law firms. Our survey indicates that many firms have fallen foul of or prevented some type of cyber-attack and are therefore rightly aware of and take this threat extremely seriously
Survey of Irish law firms 2017/2018
33
34%
Firms subject to cyber-attack in the last 12 months
61%
Top 20 firms subject to cyberattack in the last 12 months
64%
Security breach caused by malware
60%
Year on year increase in Top 20 firms reporting cyber-attacks
Law firms reporting they are increasingly subject to cyber-attack This year, we delved deeper into the nature and consequences of these attacks, our results are both enlightening and frightening for firm partners and management teams. Law firms present a very attractive target for cyber-criminals. They hold sensitive and potentially valuable data about individuals and often valuable corporate information for example concerning M&A or contracts. Law firms are also party to large financial transactions and manage significant client accounts. Fraud through diversion and personal manipulation via email or internet are real and prescient risks. 70% of firms (78% of Top 20) view cyber-security as one of their top three biggest technology issues facing their firm. Of the firms reporting they were subject to cyber-attack, Malware was by far the most reported manifestation. Interestingly Top 20 firms reported they were subject in greater numbers to Phishing attacks (18%) relative to the survey average (10%). Ransomware accounted for 18% of all attacks.
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Smith & Williamson
Be prepared •
• •
No industry or firm is immune from cyber-attack and no system is invulnerable, particularly when you factor in the human and behavioural elements. Of the firms reporting they were subject to a cyber-attack, over four in ten reported they suffered down time. Only one in ten of the Top 20 firms suffered down time, even though they were subject to a greater level of attack. The consequences for some were severe, with 18% reporting very significant or fairly significant impact on their business, a figure that is double that reported in our 2016 survey. Most firms (82%) have an established process to address computer security breaches (100% of Top 20 Firms). This still leaves nearly one in five firms without an established protocol, a figure which worryingly raises to one in three firms outside Dublin. In our view, every firm needs a plan to manage and handle such attacks and security breaches.
Our view Cyber-crime is a reality and a rising threat to legal practices in Ireland. Attacks will happen. While it’s impossible to be 100% secure, protecting your firm against the vast majority of low level, opportunistic cyber-attacks need not be particularly technically challenging and expensive. You and your firm need however to be ready.
•
• • •
Have a plan; What is your technical response and do you have your data backed up? What is your customer service response? How will you manage media, the regulator and the Data protection commissioner? The good news is that 89% (100% - Top 20) of firms report they have established processes to address a breach. Know what’s valuable; Do you know what data your firm has? What data is valuable? Are you keeping the data secure? Have a team; This is not just the IT team’s problem! As an issue that can affect the entire firm you should have a cross functional “war cabinet” ready to go. Decide who will make decisions. Do you need external advisors like a PR firm to be briefed and retained? Test your plan; Get the team together, run a scenario, test the team, update and refresh your plan and, most importantly, test again.
The vast majority of cyber-crime occurs because of inadequate security processes, poor password discipline or clicking on links which install malware. Some fall victim to disgruntled former employees who are still able to access systems. Using strong passwords, having regular IT security reviews, installing the most up to date security features and basic training will stop most of these types of attack. Management teams should stay focused on the future benefits of technological change and ensure that the clear and present cyber-risks are effectively managed rather than being allowed to dampen their ambitions.
Survey of Irish law firms 2017/2018
35
Brexit: the uncertainty continues
36
Smith & Williamson
Brexit: the uncertainty continues Brexit is anticipated, to result in more opportunities by most of the top Irish law firms. It will also result in more competition, with UK law firms expected to open offices in Dublin, or to seek merger and acquisition opportunities with Irish firms or poach lateral hires from them. The triggering of Article 50(2) by the UK government in March 2017 has set the clock ticking to March 2019 and what will happen when the UK exits the EU. Will there be an agreement in place? Will there be an interim agreement in place (as sought by the UK government of at least two years) or will there be no agreement. The implications of these scenarios is a real source of concern.
Paul Wyse
Brexit will have a significant impact on the legal sector over the next five years. This year saw some of the larger UK law firms opening greenfield operations in Dublin and more will follow.
We will not know the terms of the exit for some time which makes it difficult to have concrete views on what the impact will be on individuals and businesses in Ireland. There are no guarantees that trade without tariffs or border checks will continue. The uncertainty will have a cost in the form of less investment and slower growth until we have more clarity on what will happen. Brexit will have an impact on the Irish economy, the scale of which will depend on whether there is a hard or soft Brexit. The ESRI have calculated that for every 1% drop in GDP in Britain 0.3% is shaved off the Irish economy. Currency fluctuations are posing immediate challenges with a weakening sterling making Irish exports to the UK less competitive. Exporters to the UK are already seeing intense pressure on margins and pricing strategies as a result. Cheaper UK imports and prices across the border in Northern Ireland will impact on the domestic economy, especially in the retail sector. The UK is the EU’s biggest recipient of foreign investment. If even a fraction of its foreign investment businesses were to be attracted to Ireland it could have a very positive impact on the Irish economy. The competition between European cities and capitals for financial services companies from the UK or international businesses looking at alternate locations to the UK has begun and is intense. Post Brexit, Ireland will have lost an important ally at the negotiation table in particular regarding the desire in the EU for more tax harmonisation. Recently the President of the EU, Jean Claude Junker, in his annual State of the Union address to MEP’s, pledged that after Brexit there will be a move to end each member state’s veto on issues such as the consolidated corporate tax base, VAT and the taxation of digital economy enterprises. Moves will also be made to introduce an EU financial transactions tax. It can be anticipated that these would not result in favourable outcomes for Ireland.
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Insights from our survey
We are in a period of uncertainty on Brexit and it is sensible to consider the impact on your clients and firm of a hard exit and to be prepared for same. Most Top 20 firms in our survey have prepared a Brexit strategy and have already commenced executing it.
All of the top firms (63% of all other firms) surveyed believe that Brexit will have a significant impact on the legal profession over the next five years. Most of the Top 20 firms (86%) and almost one in two of all other firms anticipate the entry of UK firms into the Irish market as the main source of potential competition to their firm over the next three years. Many of the larger UK law firms have increased their footprint in the Irish market in the last twelve months. Pinsent Masons have recently opened an office with three partners taken from Top 20 firms. Kermans and Simmons & Simmons have recently set up greenfield operations in Dublin also hiring partners from Top 20 firms. DWF are increasing their staff numbers in Dublin and DL Piper have indicated that they will be setting up an office in Dublin. Most firms see Brexit as an opportunity to expand their client base but also see it as a threat to their existing client base. Almost two in three Top 20 firms see Brexit as an opportunity for them with the rest viewing Brexit as a threat to their firm. More than one in three (37%) of all other firms perceive that Brexit will have no impact on their firm. There has been a notable shift in the impact now anticipated by regional firms of Brexit. A majority of firms outside Dublin now expect a negative impact from Brexit on their firm.
Impact of Brexit on your firm ALL FIRMS
TOP 20
DUBLIN
REST OF COUNTRY
2016
2017
2016
2017
2016
2017
2016
2017
Positive
20%
20%
39%
45%
24%
23%
10%
11%
Negative
33%
41%
31%
44%
31%
35%
37%
53%
No impact
44%
37%
15%
11%
39%
40%
53%
32%
No response
3%
2%
15%
0%
6%
2%
0%
4%
Ireland has the most similar legal jurisdiction to the UK of all the EU states and is the only English speaking common law jurisdiction also with similar legal institutions. A number of UK firms are already reviewing their options about opening an office in Dublin and whether to merge with an existing Irish firm. The prospect of increased competition is underlined by our survey with 89% of respondents expecting more UK law firms to open offices in Dublin. Some 78% of firms anticipate an increase in mergers or acquisitions by UK law firms in Ireland post Brexit. Competition for talent will become a more critical issue for law firms as new partnership opportunities arise from UK law firms entering the Irish market. The Law Society of Ireland has reported that a record number (>1000) of solicitors from England and Wales have applied for registration in Ireland since June 2016. Some significant UK law firms are entering into the Irish marketplace albeit at a smaller level initially. This will create competition for talent and increased competition for international trading clients in particular .
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Existing and new business: short term and long term impacts In terms of new business, respondent firms see little negative impact in the short term with most Top 20 firms (61%; 37% of all firms surveyed) seeing continuing opportunity for acquisition of new customers. There is heightened concern about levels of new business in the longer term, with 34% of all firms and almost half of the Top 20 firms believing that Brexit will have a dampening effect. There is more optimism for opportunities for new clients in the longer term, with 44% of Top 20 firms (26% of all firms surveyed) anticipating such opportunities.
The areas of practice firms are concerned about that will be impacted most by Brexit
Property/construction
Corporate and commercial
49% 61%
37% 44%
of all firms Top 20 firms
Regulatory, financial services and banking
28% 72%
Survey of Irish law firms 2017/2018
of all firms Top 20 firms
of all firms Top 20 firms
Mergers and aquisitions
27% 56%
of all firms Top 20 firms
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Planning for Brexit Our survey results this year highlight that most of the Top 20 firms (83%) have prepared a Brexit strategy and that 73% of these have already executed this plan. However for the rest of firms only 3% have prepared a Brexit strategy in spite of most firms seeing Brexit as either a threat to, or opportunity for, their firm. Our recent UK law firm survey found that only 23% of firms surveyed in the UK had a strategy in place that deals with Brexit. Many firms there are clearly holding off on making substantive changes to their operations as they wait for more clarity. Law firms exposed to different sectors will see clients impacted in different ways and to different scales whether it be agri/food, retail, construction/ property, motor, leisure or financial services to name a few.
Our view The unwinding of the UK from the EU will be very difficult. Longer term impacts of the decision to exit from the EU will depend on the relationship the UK can agree with the EU and the position adopted by the EU in relation to this. While it is expected that there may be a transition period agreed for new trading agreements there is an immediate need for law firms to carry out a Brexit impact assessment on their services and their client base and ensure they are not vulnerable to client losses or lateral hire losses at a team or key individual basis. It is also important for firms to engage with the UK firms with whom they have current arrangements to refer work to/from to ascertain from them what their plans are for the Irish marketplace. There will be opportunities arising from Brexit for new clients and those firms that are prepared best and have identified targets or put in place representation arrangements will benefit more.
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Brexit from a UK perspective Uncertainty As I pick up a pen to start writing this insight, I am struck by the uncertainty that exists over the likely outcome of the Brexit negotiations, not just on the key issues of access to the European Market, the size of the ‘divorce’ bill and the Irish border, but on the detailed but highly practical issues that some of us face. For example, if you are a UK Trade Mark Attorney you may no longer be able to register a Trade Mark in the European Patent Office after March 2019. But then again you might be able to, depending on how the negotiations go. Each day brings a new soundbite from either David Davis (Secretary for State for Exiting the European Union) or his counterpart Michel Barnier (European Chief Negotiator).
Giles Murphy
Our UK survey this year found that only 23% of law firms have executed a Brexit strategic plan
Complexity While business leaders may be haranguing the government over its lack of clarity over the future direction of the UK’s relationship with the EU, aren’t we just kidding ourselves if we thought this would be straightforward. With both parties keen to demonstrate they have the upper hand in negotiations and both knowing they have potentially masses to lose from giving a mere fraction, this was never going to be an issue that would be resolved easily. Given that this is probably the most complex cross border negotiation ever to take place, being done in the glare of the media spotlight, surely a two year negotiating period should always have looked overly optimistic.
So just wait? With so much uncertainty and complexity, presumably all that firms can do is wait. That appears to be what the majority of UK firms are doing at present. Results from our 2017 UK Law Firm Survey show that only 23% of firms had executed a strategic plan to deal with either the threats or opportunities arising from Brexit.
All businesses should as a matter of urgency be undertaking a review to consider where they might have an exposure (or opportunity). They may not have a solution or want to action any plan until governments provide clarity, but they must consider likely impacts. For example, understanding how many non-UK European nationals they currently employ and what solutions may be available to these individuals, what cross border work do they currently undertake and what regulations do they require to perform their work. If, like the UK Trade Mark Attorneys, they run the risk of losing the right to operate in the UK, some sensible planning to consider setting up branches and offices in other jurisdictions would be prudent – in Dublin perhaps?
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Impact on business Over 75% of firms ranked the impact on levels of new business in the long-term among their top three Brexit threats. Just under 65% are concerned about levels of business in the short term, reflecting concern regarding the impact Brexit will have, but perhaps also suggesting that in the short term there will be additional work opportunities as businesses need legal advice to understand and respond to the exit from the EU.
Our View One argument put forward in defence of law firm’s lack of planning for Brexit is that they have many more pressing issues to deal with. By the time the UK has left the EU (particularly if there is a transitional period) some law firms will have recruited in individuals born after the millennium, potentially having up to five generations of people in the work place. At the same time, firms will need to respond to growing levels of competition, new entrants to the market, the necessity to invest in improving IT and deal with succession. Much of this all costs money and this need may start to drive a different financial model than we have seen in the past.
Brexit is just one of the many disruptive influences on law firms at a time when the pace of change is ever increasing. Firms will need to remain nimble, well financed, well governed, innovative and open minded, not least about probably this biggest influence on their business: the deployment of technology. Before you ask why you should listen to someone preach about technology who wrote this insight with a pen and paper, I can confirm that it was actually composed at 30,000 feet above the Irish Sea and downloaded to my office before I had left the airport terminal!
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Smith & Williamson
Dublin professional practices team
Liam Dowdall Tel: 01 6142528 Email: liam.dowdall@smithandwilliamson.com
Paul Wyse
Marc Lowry
Tel: 01 6142504 Email: paul.wyse@smithandwilliamson.com
Tel: 01 6142546 Email: marc.lowry@smithandwilliamson.com
Dan Holland
Ă ine Reidy
Tel: 01 6142511 Email: dan.holland@smithandwilliamson.com
Tel: 01 6142573 Email: aine.reidy@smithandwilliamson.com
Cedric Cruess Callaghan
Frank Brennan
Tel: 01 5006523 Email: cedric.cruesscallaghan@smithandwilliamson.com
Tel: 01 5006528 Email: frank.brennan@smithandwilliamson.com
Stephen Scott
Derek Ryan
Tel: 01 6142521 Email: stephen.scott@smithandwilliamson.com
Tel: 01 5006527 Email: derek.ryan@smithandwilliamson.com
Gordon Hayden
Liz Cahill
Tel: 01 6142592 Email: gordon.hayden@smithandwilliamson.com
Tel: 01 6142525 Email: liz.cahill@smithandwilliamson.com
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Managing your practice effectively Delivering growth and profitability in the legal sector Our approach Every firm has different needs and our legal practice service team tailors its approach to your unique circumstances and requirements. We do this through a focused approach on your needs and the application of insight and benchmarks gained from our experience working with our extensive client portfolio of professional practice and legal firms.
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Smith & Williamson
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