Survey of Irish law firms 2015/16
Confidence high despite intense competition
Contents About us 2 Smith & Williamson in Ireland
3
Introduction
4
Executive summary
5
Survey highlights
11
Outlook for the legal sector
12
Firm performance and key issues
16
Recruitment and retention 22 Mergers & acquisitions
27
Marketing and business development
30
IT investment and social media
33
The Legal Services Regulation Bill and the Court of Appeal
38
The impact of Brexit
42
Tax update – Budget 2016
45
Dublin professional practices team
48
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.
www.smith.williamson.ie Follow us on Twitter @SmithWilliamson and on LinkedIn for comments and links to current tax and accountancy news.
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.
About us Smith & Williamson has been managing the financial affairs of private clients and their business interests for over a century. We are one of the top 20 largest firms of accountants in Ireland (top 10 in the UK*) and our investment management business has over ₏21bn equivalent (£15.3bn) of funds under management and advice (as at 30 September 2015). Our primary aim is to help our clients achieve their financial ambitions, both corporate and personal. Our clients are varied – private individuals, mid-to large businesses, professional practices and non-profit organisations. Our business spans 13 principal offices in the UK, Ireland and Jersey, and an international capability in over 100 countries through membership of Nexia International (a top ten global network of independent accounting and consulting firms) and M&A International. In an award-winning business as diverse as ours, professionalism and teamwork are key. We recognise that clients and intermediaries take comfort from knowing they can easily reach senior people and decision-makers in our organisation who are able to understand their needs and objectives.
*According to the latest survey of the market by Accountancy magazine
The value of investments and the income from them can fall as well as rise and investors may not receive back the original amount invested.
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Smith & Williamson
Smith & Williamson in Ireland Smith & Williamson tax and business services first entered the Irish market in 2008 when it merged with Oliver Freaney & Co, one of Ireland’s leading firms of chartered accountants and business and tax advisers since 1958.
Smith & Williamson has a heritage and expertise in accounting, tax and business services in Ireland stretching back to 1958. We established Smith & Williamson Investment Management in the Irish market in April 2011 providing a suite of investment management, banking and pension services. The combination of accounting, tax and investment management services enables us to provide a unique offering in the Irish marketplace. Based in Dublin, we focus on delivery of business and personal financial services to private clients, entrepreneurs and owner-managed businesses operating domestically and internationally. Our business thrives on its people – a pool of highly talented and enthusiastic individuals who deliver a broad and innovative range of services. Technical excellence underpins how we deliver these services and our teams are dedicated to offering practical financial solutions, without compromising on delivering a genuinely director-led service. As a result of our expansion we recently opened our second office in Herbert Street in Dublin city primarily housing our investment management team and offering all of our clients the opportunity to meet us in the city centre.
Important information: The value of investments and the income from them can fall as well as rise and investors may not receive back the original amount invested. Past performance is not a guide to future performance.
Survey of Irish law firms 2015/2016
3
Introduction We are delighted to present our fourth annual Smith & Williamson Survey of Irish law firms. Smith & Williamson also conducts research on law firms in the UK and has done so for the last 20 years.
The legal sector continues to be an extremely important sector for Smith & Williamson. Our professional practices team has provided accounting, tax, advisory, and mergers and acquisition services to the sector over many years. The annual Smith & Williamson Survey of Irish law firms highlights our continuing commitment to and partnership with the legal sector in Ireland. We wish to especially thank the partners in the legal firms who gave their time to participate in the survey. It is very pleasing to report that this year our survey has seen continuing positivity, confidence and growth in the sector in the last 12 months and it suggests this will continue into 2016. Firms were typically represented by their managing partner or a senior partner. The survey seeks to review current attitudes, and enquire about key issues and market sentiment in the legal sector. We would like to thank Amárach Research for its help in conducting the research for this survey. We hope you enjoy our report which sets out the analysis and findings of our survey.
Paul Wyse Managing Director, Dublin Office
Survey methodology Our national survey was carried out through telephone interviews in September and October 2015 by Amárach Research. A total of 105 law firms took part in the survey (104 in 2014).
4
The Survey of Irish law firms 2015/16 includes:
Respondents’ head office locations:
• 15 of the top 20 Irish law firms • 13 mid-tier firms • 77 small firms.
• • • •
70 in Dublin 15 in rest of Leinster 18 in Munster 2 in Connaught and Ulster
Smith & Williamson
Executive summary Growth and confidence The improving economic conditions and increasing confidence in the economy are reflected strongly in this year’s survey. There has been a sharp acceleration in the pace of growth of the Irish economy in the first half of 2015. Growth in consumption and employment confirm that the domestic economy is now expanding strongly and growth has become more widely based. GDP (Gross Domestic Product) growth is forecasted at 5.8% for 2015 and 4.7% for 2016 according to the latest Central Bank of Ireland quarterly economic commentary.
Paul Wyse
Nearly three out of four firms surveyed believe the outlook for the year ahead will improve.
Unemployment has dropped from 11.2% in 2014 to a forecasted 9.5% for 2015. While CPI (Consumer Price Index) continues to run at a very low rate of 0.3% forecasted for 2015, the services index has increased by 3.8% and is forecasted to grow by 3.5% for 2016 while the index for goods in 2015 has decreased by 3.3% this year, primarily due to falls in oil prices. This economic positivity is mirrored by over 74% of law firms (100% of the top 20 firms), who believe the business outlook for the legal sector in Ireland improved in the last 12 months and expect the outlook for the legal sector to further improve in 2016. This is consistent with the sentiment of firms in our 2014 survey albeit a slight decrease overall and an increase for the top 20 firms.
Legal sector outlook in past 12 months 2013
2014
2015
Top 20-2014
Top 20-2015
Improved
57%
84%
74%
88%
100%
Remained stable
31%
13%
21%
6%
0%
Deteriorated
12%
3%
5%
6%
0%
Legal sector outlook in next 12 months 2013
2014
2015
Top 20-2014
Top 20-2015
Will improve
66%
81%
74%
88%
100%
Will remain stable
30%
18%
24%
12%
0%
Will deteriorate
4%
1%
2%
0%
0%
A total of 70% of firms (87% of the top 20 firms) experienced an improved outlook for their firm over the last 12 months (77% in 2014), and indicated they expect to see an improvement again in 2016.
Survey of Irish law firms 2015/2016
5
Employment, recruitment and retention The legal sector continues to create additional jobs and all of the top 20 respondent firms have seen an increase in their staff numbers this year as did almost half of all firms surveyed (49%). Most of the top 20 firms surveyed (93%) and 57% of all firms surveyed expect their staff numbers to increase in 2016. More trainee solicitors have been taken on in the last twelve months by most of the top 20 firms (80%) and this is expected to continue in 2016. In 2014 there were 9,224 (2013: 8,895) practising solicitors - an increase of 329 (4%). This is expected to increase by another 300 at least in 2015 according to the Law Society’s most recent annual report. Law firms employ currently 80% of all practising solicitors. The Law Society recently reported a first time female majority (51%) of practicing solicitors in Ireland. This is the first time a female majority has existed in the legal profession according to the Law Society.
Numbers of staff in the last twelve months 2013
2014
2015
Top 20-2014
Top 20-2015
Increased
37%
41%
49%
94%
100%
Remained the same
51%
47%
40%
0%
0%
Decreased
12%
12%
11%
6%
0%
The increase in staffing levels means competition for talent is becoming more of a challenge. Hence, the recruitment and retention of staff is presenting increasing difficulties for firms and remains a key issue for the sector, according to 38% of all firms surveyed and 73% of the top 20 firms. Consequently, 29% of firms (67% of top 20 firms) reported pay increases of 5%+ in 2015. It is important to note that many smaller firms still recovering from the recession made no pay increases in the last 12 months (36% of firms (56% in 2014)) and more than one in ten firms decreased their numbers of staff.
Areas of practice growth Property/conveyancing, and litigation/dispute resolution, are the principal practice areas driving growth in law firms again this year. Larger firms also experienced significant growth in the corporate and commercial, regulatory/financial services/banking and M&A practice areas over the last 12 months as transactions increased. There is an expectation that these areas will continue to drive growth in 2016.
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Revenues and profits The improvement in trading conditions has resulted in many firms enjoying increased revenues and profits again in 2015, with 70% of firms (93% in the top 20) reporting an increase in revenues. Profits have increased in 64% (73% of the top 20 firms) of firms surveyed and 46% of firms are reporting a year on year increase in billable hours in this year’s survey (73% of top 20 firms). The improvement in profits and revenues has translated to profits per equity partner increasing in 56% of all firms surveyed and 73% of top 20 respondent firms.
Revenue growth 2013
2014
2015
Top 20-2014
Top 20-2015
Increased
53%
64%
70%
81%
93%
Remained the same
18%
26%
25%
0%
7%
Decreased
26%
10%
5%
13%
0%
Don't know
3%
0%
0%
6%
0%
Profit growth
Survey of Irish law firms 2015/2016
2013
2014
2015
Top 20-2014
Top 20-2015
Increased
45%
55%
64%
63%
73%
Remained the same
22%
33%
28%
13%
20%
Decreased
30%
10%
8%
19%
7%
Don't know
3%
2%
0%
5%
0%
7
Key issues Competitive pressure might have been expected to ease as firms get busier. However, our findings reflect wider changes in the legal sector driven by fixed fees, more entrants to the market and client demands. The sector continues to move away from traditional delivery methods and pricing structures. Fixed fees and value billing will have a significant impact on the profession according to 79% of respondent firms over the next 5 years. Increased competition has resulted in a downward pressure on fees (mentioned by 47% of those surveyed) in the last year. In an attempt to counter this, 64% of firms (73% of the top 20 firms) have agreed to more fixed fees for assignments in the last 12 months. More than one in two firms believe that the level of competitive pressure in the legal sector has increased over the last year and one in three stated it impacted their own firm. Maintaining profitability and pressure on fees remain the key issues for law firms over the next twelve months. Managing cash flows is expected to continue to present issues for almost half of all respondents (53%), mainly mid-tier and smaller firms in the next twelve months but it also was stated to be a key issue for 33% of the top 20 firms surveyed. As turnover increases and working capital funding is required we expect these pressures will increase. A total of 28% of respondents highlighted the rise of operating costs as an issue over the last 12 months. It is interesting to note that one in ten firms (20% of the top 20 firms) has mentioned office space as a key issue facing their firm over the next twelve months. This relates to rents increasing in the marketplace and space requirements. While overall the outlook was positive, the economy and the fragility of the economic recovery still give almost half of all respondents concerns over the next twelve months. This is probably heightened by the fact that we are facing an election in 2016 and no one is certain of the outcome. The recent Persona/Sigma case concerning the third party funding of litigation (by Harbour Litigation Funding a British based funder) has raised many concerns for the profession. Over half of firms surveyed (and 67% of the top 20 firms) are, however, in favour of such funding. 57% of firms (80% of the top 20) are, however, against crowdfunding being used to fund litigation cases.
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Smith & Williamson
Mergers and acquisitions More than one in two firms surveyed (58%) expect the level of merger activity in the legal sector to increase over the next year. Over the last two years 25% of firms (47% of the top 20 firms) have made an approach to another firm with a view to a potential merger or team acquisition. One in three of the firms surveyed (67% of the top 20 firms) have been approached with a view to a potential merger or acquisition over the same period. But while there are plenty of merger discussions within the sector few appear to make it to the finish line. Partnership is a difficult business model in which to complete mergers/acquisitions successfully.
Actions taken by firms Most firms, 76% (93% of top 20 firms) have made changes to their business processes to improve their efficiency and half of the law firms surveyed continue to reduce their operating costs. Fixed fees for assignments are now the norm and 64% of firms (73% of the top 20) are reporting an increase in fixed fees for assignments. Firms continue to increase sales and marketing efforts. Almost two-thirds of firms surveyed (87% of the top 20 firms) have increased their marketing and sales efforts in the last 12 months. More than half of firms have targeted new markets (80% of the top 20 firms) and nearly four in ten introducing new services (73% of the top 20 firms).
Brexit Most firms surveyed (59% and 87% of the top 20 firms) believe that the legal sector in Ireland would be impacted by the UK leaving the EU. Most fear that our imports and exports with our most important trading partner would be where we would see most impact. Almost one in three (one in two of the top 20 firms) believe that their own firm would be impacted. 22% of all firms surveyed stated all areas of practice would be affected. The practice areas anticipated to be impacted most by the top 20 firms would be regulatory, banking and financial services. One in ten firms (one in three of the top 20 firms) are concerned that there would be a reduction in the referral of work or UK legal activity in Ireland. In a recent study commissioned by the UK Law Society, it was estimated that the UK legal sector could lose between ÂŁ225m and ÂŁ1.7bn of yearly output by 2030 if the UK voted to separate from the EU. Our UK survey results show that 60% of firms surveyed think that there would be a negative impact on their firm if the UK left the EU.
Survey of Irish law firms 2015/2016
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Legal Services Regulation Bill The delay in implementing this Bill has been the subject of much media comment. One in three of the firms surveyed think that the Bill will not be implemented for another twelve months and circa 20% stated that they did not know when it will be implemented. The Minister for Justice and Equality has stated that the Government is intending to enact the Bill before the end of this year. The two changes suggested most by firms surveyed to the current Bill as drafted were: • Provision should be made for limited liability partnerships • Remove the multidisciplinary element in the Bill.
The new Court of Appeal The new Court of Appeal has disposed of 748 appeals in the nine month period to 31 July 2015. This Court inherited circa 2000 civil and criminal case appeals. It has taken on 750 new appeal cases since it was established. The Court is viewed by most practices surveyed (90%) as achieving or exceeding expectations and only 10% view it as achieving less than envisaged (although this increases to 27% among the top 20 firms). The key impacts the Court has had according to firms surveyed are: • improving the appeals process, and • reducing waiting times for appeals. In last year’s survey, four in five of the firms surveyed believed that the new Court of Appeal would help Ireland’s international reputation. This Court appears to be delivering on its objectives.
IT Investment and Social Media Firms report spending on IT to be 4.9% of turnover (including IT salaries). Significant investment occurred in IT over the last 12 months with 83% of all firms reporting they invested in their IT systems. Almost two in three firms are planning further IT investment in the next 12 months. Historically firms invested in IT to improve their record keeping and administration. In 2015 68% of firms increased their investment in IT in order to achieve greater efficiencies as the marketplace is more competitive and there continues to be increased pressure and demand for fixed fees. A further 14% of firms surveyed listed security concerns as the reason for their increasing investment in IT. Cyber attacks are becoming more prevalent. One in three of the top 20 firms (and one in five overall) reported that they were the subject of cyber attacks in the last 12 months. While attitudes in the legal profession to social media are shifting, adoption levels have not changed in the last 12 months. In 2015 one in three firms surveyed maintain they don’t use any form of social media (46% in 2014).
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Smith & Williamson
Survey highlights 6
1
11
12
7
2
One in two firms (two in three of top 20 firms) are in favour of third party funding of litigation cases but are opposed to crowd funding being used (57% overall and 80% of top 20 firms).
64% of firms have agreed more fixed-fee arrangements for work in 2015.
The key issues facing the legal sector over the next 12 months continue to be: • Maintaining profitability • Pressure on fees • Managing cash flow • The economy • Recruitment and retention of staff (top 20 firms).
Most firms surveyed (90%) think that the new Court of Appeal has achieved or exceeded their expectations.
29% of firms implemented a pay increase of 5%+ (67% of the top 20 firms) while 36% of the firms surveyed made no change to levels of pay
There is a continuing confident outlook for 2016 in the legal sector. Almost three in every four firms anticipate an improved outlook for their firm and the sector.
8
Over 50% of firms think the level of competitive pressure has increased over the last year.
13 Most firms surveyed (59% and 87% of the top 20 firms) believe that the legal sector in Ireland would be impacted by the UK leaving the EU. The areas most impacted (top 20 firms) would be regulatory, banking and financial services.
3
4
5
9 Revenues increased in 70% of firms in the last year (93% of the top 20 firms).
Profits increased in 64% of firms in the last year (73% of the top 20 firms).
49% of firms have increased their staff numbers in 2015 (100% of the top 20 firms).
One in two firms reduced their operating costs in 2015 (33% of the top 20).While more than one in four firms reported increased operating costs.
14
10
One in three firms surveyed do not think the Legal Services Regulation Bill will be implemented in the next twelve months.
15
Survey of Irish law firms 2015/2016
One in five firms surveyed have had cyber-attacks on their IT systems in the last twelve months (one in three of top 20 firms).
Most law firms do not have formal succession planning in place.
11
Outlook for the legal sector
Smith & Williamson
Outlook for the legal sector The recovery of the Irish economy has continued in 2015 and Ireland again looks set to record the highest growth in GDP in the euro zone (5.8%). Investment and net exports are the key drivers of this growth. Noticeable consequences of this growth are that unemployment has fallen to 9.5% (from a high of 14.5%) and personal consumption is increasing. The positive outlook for the general economy was reflected in our 2014 review and is echoed again in this year’s survey with 74% (2014: 84%) noting an improved outlook for the sector in 2015 and into 2016. Although still very positive, the decrease in sentiment year on year reflects the increasingly competitive environment with more than one in two firms (57%) stating that the sector has become more competitive over the past 12 months.
Seán McNamara
With three out of four firms expecting an improved outlook in 2016 the legal sector is reporting that for the majority revenues are up and profitability has increased which has boosted profit per equity partner.
Sector outlook in last 12 months 2013
2014
2015
Top 20-2014
Top 20-2015
Improved
57%
84%
74%
88%
100%
Remained stable
31%
13%
21%
6%
0%
Deteriorated
12%
3%
5%
6%
0%
Sector outlook in next 12 months 2013
2014
2015
Top 20-2014
Top 20-2015
Will improve
66%
81%
74%
88%
100%
Will remain stable
30%
18%
24%
12%
0%
Will deteriorate
4%
1%
2%
0%
0%
Growth & Opportunities Firms reported growth across practically all business areas in 2015. Corporate and commercial in addition to mergers and acquisitions have recorded good growth in the year, for the larger firms, with the sentiment continuing for 2016. For the second year running property departments continued to be the standout performers with 84% of firms recording growth in the year. However, as an overall contributor to firm’s performance this should not be taken out of context since the residential sector is coming off a very low base of an expected 10,000 housing starts in 2015. There is expected to be another circa €20 billion of loan purchase transactions again this year with much property included in those portfolios. After a number of years of growth in debt recovery, insolvency and corporate restructuring these areas are showing signs that they are beginning to taper off as we continue to work through the banking and related solvency issues of the past 8 years. Competition and pressure on fees are still on the increase. Of the challenges facing the sector, fee pressure, maintaining profitability and managing cash flow continue to be the top three challenges. This again has resulted in most (64%) firms agreeing more fixed and discounted fees over the past 12 months.
Survey of Irish law firms 2015/2016
13
Key issues facing the legal sector in the next 12 months 2013
2014
2015
Top 20-2014
Top 20-2015
Pressure on fees
65%
51%
68%
56%
67%
Maintaining profitability
72%
58%
57%
56%
33%
Managing cash flow
64%
55%
50%
56%
47%
Economy
48%
54%
45%
69%
47%
Recruitment and staff retention
9%
31%
34%
25%
80%
Partner performance
15%
8%
10%
25%
7%
Legal Services Regulation Bill
22%
32%
24%
13%
7%
Recruitment of staff is becoming a more significant challenge, with over 3 times as many firms reporting this as an issue compared to 2013. Notably it is the most significant issue identified by the larger firms in this year’s survey. A related consequence is that 59% of firms awarded pay increases during the year, compared to 40% (2014) and 35% (2013).
Key issues for the legal profession over the next five years More than one in two firms stated that the legal sector has become more competitive in the last 12 months. Competitive pressures might have been expected to ease as firms get busier. However, our findings reflect wider changes in the legal sector market driven by fixed fees, more entrants to the market and client demand. The sector continues to move away from traditional delivery methods and pricing structures. Fixed fees and value billing will have a significant impact over the next five years as mentioned by 79% of firms in our survey. Changing fee structures and technology are expected to have the biggest impact on firms over the next five years. Firms are increasingly recognising the importance of a distinctive value proposition and 45% of firms increased marketing expenditure last year (87% of top 20 firms). The importance of marketing and brand development is seen by more than one in two firms as being a key issue for the sector over the next five years. A key challenge for the legal sector will be to grow business in the face of increasing competition and highly demanding clients asking for “more for less�. Firms with a clear strategy that resonate with clients will prosper. Firms have a major challenge to adapt their fee structures as traditional time billing becomes increasingly a thing of the past and clients demand greater certainty and value over costs, as well as expecting their advisers to share the cost risk.
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Smith & Williamson
Use of technology for managing firms and improving service delivery and process efficiency is another major challenge identified by most firms (79%) over the next five years. Firms have identified the client service delivery model as a key issue. They are looking to invest in technology as a means of reducing costs and opening up new communication channels with clients to deliver the modern, speedy, effective and secure services that they are looking for. Investment in technology and using it to interact with clients is also viewed by firms as vital going forward.
Key issues for the legal sector over the next 5 years 100% 80% 60% 40% 20% 0% Globalisation
Outsourcing of business functions
Flexible working arrangements
Marketing Changing and brand reward/ development remuneration models
Use of Use of Changing technology technology to fee to interact manage the structures, with clients firms e.g. fixed fees, value billing
Top 20 firms very significant or significant impact All firms very significant or significant impact One in two firms identified that changing reward/remuneration models will impact the sector and one in three firms stated that the adoption of flexible working arrangements will be an issue for the sector over the next five years.
Survey of Irish law firms 2015/2016
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Firm performance and key issues
Firm performance and key issues The results of this year’s survey indicate an overall improved firm outlook with enhanced performance and increased profitability. A significant 70% of firm’s surveyed (77% in 2014) reported an improved outlook for their business in the last 12 months. Furthermore, 70% (81% in 2014) are expecting an improved outlook in 2016. Most top 20 firms (87%) feel that the outlook for their firm has improved and will also improve further over the next 12 months.
Firm outlook in past 12 months
Catriona Lawless
The growth in the Irish economy and the current economic positivity in Ireland is mirrored by the sentiment and results of the law firms surveyed.
2013
2014
2015
Top 20-2014
Top 20- 2015
Improved
57%
Remained stable
29%
77%
70%
92%
87%
21%
28%
8%
13%
Deteriorated
14%
2%
2%
0%
0%
Firm outlook in next 12 months 2013
2014
2015
Top 20-2014
Top 20- 2015
Will improve
66%
81%
70%
83%
87%
Will remain stable
30%
18%
30%
17%
13%
Will deteriorate
4%
1%
0%
0%
0%
Overall, 2015 has seen a continuation of the trends noted in 2014. Notably: • Revenues up. • Profitability up. • Staff utilisation rates up.
Revenues and profits The improvement in trading conditions has resulted in many firms enjoying increased revenues and profits again in 2015, with 70% of firms (93% in the top 20) reporting an increase in revenues. Profits have increased in 64% (73% of the top 20 firms) of firms surveyed and 46% of firms are reporting a year on year increase in billable hours in this year’s survey (73% of top 20 firms). The improvement in profits and revenues has translated to profits per equity partner increasing in 56% of all firms surveyed and 73% of top 20 respondent firms.
Firm’s profitability in past 12 months 2013
Survey of Irish law firms 2015/2016
2014
2015
Top 20-2014 Top 20- 2015
Increased
45%
55%
64%
58%
73%
Remained the same
22%
33%
28%
17%
20%
Decreased
30%
10%
8%
17%
7%
Don’t know
3%
2%
0%
8%
0%
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Firm’s revenue in past 12 months 2013
2014
2015
Top 20-2014
Top 20- 2015
Increased
53%
64%
70%
83%
93%
Remained the same
18%
26%
25%
17%
7%
Decreased
26%
10%
0%
0%
0%
Don’t know
3%
0%
0%
0%
0%
Top 20-2014
Top 20- 2015
Firm’s profit per equity partner in past 12 months 2014
2015
Increased
42%
56%
50%
73%
Remained the same
40%
33%
17%
20%
Decreased
13%
6%
17%
7%
Don’t know
5%
5%
16%
0%
Areas of practice growth Property, conveyancing, litigation and dispute resolution are the principal practice areas driving growth in many firms. This reflects an increase in capital availability and pent-up demand for both residential and commercial property fuelled by significant overseas funds and investors looking to invest in Irish property. Larger firms also experienced significant growth in the corporate and commercial, regulatory, financial services, banking and M&A practice areas over the last 12 months as transactions increased. There is an expectation that these areas will continue to drive growth in 2016.
Expected growth practice areas Grown past 12 months
18
Will grow next 12 months
Top 12 practise area
2014
2015
Top 20
2014
2015
Top 20
Litigation and dispute resolution
55%
61%
67%
48%
53%
53%
Corporate and commercial
46%
47%
100%
38%
45%
80%
Property, construction and conveyancing
91%
84%
93%
82%
75%
60%
Mergers and acquisitions
15%
21%
73%
20%
27%
73%
Regulatory/financial services and banking
24%
22%
73%
16%
18%
60%
Debt recovery
28%
30%
40%
11%
19%
27%
Employment/pensions, health and safety
44%
39%
47%
20%
27%
40%
Insolvency and corporate restructuring
21%
23%
27%
13%
15%
13%
Intellectual property
12%
18%
40%
8%
16%
47%
Energy and natural resources
12%
11%
40%
3%
8%
27%
Privacy and data security
16%
26%
67%
8%
19%
47%
Tax
21%
27%
47%
12%
18%
33%
Smith & Williamson
Key issues for firms Most firms have seen revenue and profitability continue to increase in the last 12 months. However a key issue facing the sector is maintaining profitability due to a challenging fee environment and increased competition. The following issues challenged firms’ abilities to maintain profitability levels over the past 12 months: • The downward pressure on fees • Changing fee structure, e.g. fixed fees and value billing • Increased competition The most significant issues reported in the past 12 months impacting the majority of firms were downward pressure on fees (47% of firms), closely followed by cash flow pressures (32% of firms), increased competition (29% of firms), increased operating costs (28% of firms), attracting/ retaining talented professionals (28% of firms) and availability of finance (19% of firms). This is in contrast to the responses from the top 20 firms with 73% agreeing that attracting and/or retaining staff had a very significant impact on them over the past 12 months.
Issues significantly impacting firms in the last 12 months 2013
2014
2015
Top 20 - 2015
Availability of finance
27%
25%
19%
7%
Downward pressure on fees
61%
59%
47%
33%
Attracting/retaining talented professionals
N/A
18%
28%
73%
Increased competition
24%
15%
29%
33%
Increasing operating costs
N/A
29%
28%
27%
Cash flow pressures
47%
51%
32%
20%
Looking forward the key issues identified for 2016 are maintaining profitability (64%), pressure on fees (57%), managing cash flow (53%), recruitment and retention of staff (38%) and the economy (35%). Unsurprisingly the top 20 firms have identified that recruitment and retention of staff will continue to be a significant issue over the next twelve months (73%).
Key issues facing firms in the next 12 months
Survey of Irish law firms 2015/2016
2013
2014
2015
Top 20-2014
Top 20- 2015
Economy
46%
49%
35%
33%
40%
Recruitment & retention of staff
12%
34%
38%
67%
73%
Maintaining profitability
76%
58%
64%
50%
53%
Partner performance
16%
10%
12%
42%
27%
Managing cash flow
66%
56%
53%
17%
33%
Pressure on fees
64%
50%
57%
50%
47%
Legal Services Regulation Bill
15%
27%
21%
25%
7%
Office Space
N/A
N/A
11%
N/A
20%
19
Actions taken by firms to improve performance It is noteworthy that 93% of top 20 firms (75% in 2014) indicated they have changed business processes to become more efficient. They continue to increase expenditure on marketing and business development to achieve revenue growth, as highlighted by 87% of top 20 firms. There has also been a noticeable increase in • sales/marketing efforts reported by most firms (61%) • targeting of new markets (52%) (and 80% of top 20 firms) by most firms. • Introduction of new services by 39% of firms (73% of top 20 firms) The top 20 firms remain more active in driving new business to improve their firm’s performance. They have made an increased effort in targeting new markets over the past 12 months in an attempt to increase revenues, and have continued to introduce new services to boost revenue from existing and new clients.
Actions taken by law firms to improve performance 2013
2014
2015
Top 20- 2014
Top 20- 2015
Increased sales/marketing efforts
66%
64%
61%
92%
87%
Discounted/reduced fees/agreed to more fixed fees
81%
70%
64%
83%
73%
Reduced operating costs
69%
61%
50%
33%
33%
Engaged professional advisers/third party support
46%
46%
46%
50%
60%
Targeted new markets
67%
59%
52%
83%
80%
Introduced new services
57%
48%
39%
75%
73%
Changed business process(es) to be more efficient
79%
80%
76%
75%
93%
Restructured financial commitments
41%
29%
26%
17%
20%
Outsourced administration/finance
10%
11%
9%
8%
7%
The pressure on fees continues to be evident with the change from traditional pricing structures to more value billing and fixed fees as stated by 64% of firms (73% of the top 20 firms).
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Smith & Williamson
Working capital Working capital management remains a challenge for many law firms, with 53% of respondents indicating cash flow management was one of the key pressures faced by their firm in the past 12 months. Managing the working capital process should be a priority for partners in every law firm and there needs to be leadership in this area in order to improve working capital performance. One in three firms surveyed have more than 180 days turnover tied up between debtors and work in progress. Achieving a lock-up profile of less than 120 days remains a challenge. One in five firms indicate working capital being tied up in debtors over 90 days (one in three of top 20 firms) and more than one in three report working capital being tied up in work in progress over 90 days. As business improves and turnover increases more cash will be tied up in working capital required to fund debtors and work in progress. This is a key area for management in law firms as more partner capital/bank funding is required unless significant improvements are made.
Working capital days tied up in debtors and work in progress % of working capital tied up in debtor days 2013
2014
Top 20
Up to 30 days
30%
23%
7%
31 – 60 days
26%
23%
61 – 90 days
21%
23%
% of working capital days tied up in work in progress 2013
2014
Top 20
Up to 30 days
12%
11%
7%
20%
31 – 60 days
19%
16%
20%
40%
61 – 90 days
16%
21%
20%
91 – 120 days
9%
10%
26%
91 – 120 days
12%
10%
7%
121+ days
8%
9%
7%
121+ days
26%
25%
33%
Don’t know
6%
12%
0%
Don’t know
15%
17%
13%
Partners and fee-earners should understand their working capital management responsibilities. We find training of partners, especially new partners, and the implementation of strict and tough provisioning policies encourages better billing and collection practices.
Survey of Irish law firms 2015/2016
21
Recruitment and retention
Smith & Williamson
Recruitment and retention The good news story from our survey is the continuing increase in employment again this year in the legal sector. All of the top 20 firms surveyed have shown an increase in employee numbers as have almost half of all firms surveyed. Following the trend of recent years and continued growth in the legal sector, increased staffing requirements continue to be a factor for a significant number of firms. In 2014 there were 9,224 (2013: 8,895) practising solicitors - an increase of 329 (4%). This is expected to increase by another 300 at least in 2015 according to the Law Society’s most recent annual report. Law firms employ currently 80% of all practising solicitors. The Law Society recently reported a first time female majority (51%) of practicing solicitors in Ireland. This is the first time a female majority has existed in the legal profession according to the Law Society.
Áine Reidy
With employment and recruitment buoyant in the legal sector, competition for talent is driving pay increases as it becomes increasingly difficult to attract and retain solicitors at all levels.
57% of all respondents expect overall staff numbers to increase further in the coming 12 months with 93% of the top 20 firms expecting this to happen. One in three law firms currently have vacancies they are trying to fill. 80% of the top 20 firms currently have vacancies and almost half currently have five or more vacancies.
Staff Numbers in the Past 12 Months 2013
2014
2015
Top 20- 2014
Top 20- 2015
Increased
37%
41%
49%
94%
100%
Remained the Same
51%
47%
40%
0%
0%
Decreased
12%
12%
11%
6%
0%
Expected Staff Numbers in the Next 12 Months 2015
Top 20- 2015
Will increase
57%
93%
Will remain the same
40%
7%
Will decrease
3%
0%
Pay increases There has been a notable increase in the number of firms paying salary increases in the last 12 months. This has increased from 40% in 2014 to 59% in 2015 with all of the top 20 firms paying increases in the year and 67% paying increases of 5%+. This will continue to be an area of increasing pressure in the coming 12 months.
Pay increases None/no pay increase
Survey of Irish law firms 2015/2016
2013
2014
2015
Top 20-2014
Top 20- 2015
56%
56%
36%
19%
0%
1% - 3%
8%
5%
10%
0%
13%
3% - 5%
15%
8%
20%
56%
20%
5%+
12%
27%
29%
6%
67%
Pay decreases
7%
0%
0%
19%
0%
Don’t know
2%
4%
5%
0%
0%
23
Recruitment and retention of staff The recruitment and retention of staff is a key issue for all professional firms. Sourcing, hiring, training, developing and retaining quality individuals is the key to survival, future growth and success. Staff recruitment and retention are increasingly presenting difficulties for firms. 28% of all firms noted that attracting and retaining talented professionals has had a significant impact on the firm in the last 12 months. This is compared to 18% in 2014. This is an area of growing concern for all and already it is suggested it will become a bigger problem for the sector in 2016 especially for larger firms (73%). The legal sector has many of the people issues faced by other sectors – the need to identify, attract, recruit, retain and reward talented people. With increasing competition for talent, it is candidates rather than employers who will increasingly hold the power in the recruitment environment. Bidding by existing employers is now a common theme in the recruitment market and late decisions by candidates to change one’s mind having accepted a job offer are more common. Firms need to consider their talent 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 and a clear path to career development, including a clear roadmap to partnership, for those that merit it, and a rewarding and fulfilling career for those with different career aspirations. 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. Most of the top 20 firms (73%) surveyed have defined career paths/development plans for staff whereas in contrast most smaller firms (61%) do not. In light of the increasing significance for firms of attracting and retaining staff it is perhaps surprising that very few firms (7% of the top 15 firms) use social media as a method of recruiting. It may however evidence a shift back towards more traditional methods of recruitment and the engagement of professional recruitment services. The importance of skills development and coaching has long been recognised in the corporate world. Almost all (80%) of the top 20 firms have a mentoring system in place while 42% of all firms surveyed stated that they had such a system in place. The demand for attracting and retaining quality individuals is increasing. It is, however, disappointing that firms report their development of staff and the identification of clearly defined career paths is on the decline with only 37% of firms noting that they had such strategies in 2015 compared to 57% in 2014. The average spend indicated by respondent firms on professional training and development is 2.1% of turnover (2.4% for top 20 firms).
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Smith & Williamson
Firms reporting they have a defined career path and development plan for staff 2014
2015
Top 20-2015
Yes
57%
37%
73%
No
43%
61%
27%
Don’t know
0%
2%
0%
The importance to firms of structured staff appraisals is in decline with 66% of firms stating that they performed structured staff appraisals on an annual basis in 2015 compared to 89% of firms in 2014. All of the top 20 firms reporting having at least one structured appraisal a year for staff and almost one in two have at least two. One in three firms have no structured appraisal of staff at all.
Regularity of firms structured staff appraisals 2014
2015
TOP 20-2015
Once a year
55%
39%
53%
Every 6 months
29%
17%
40%
Every 3 months
5%
10%
7%
No structured appraisal
9%
30%
0%
Ongoing
0%
3%
0%
Other
2%
2%
0%
Employment of graduate and trainee solicitors The number of trainee solicitors being taken by firms continues to increase. In the past year almost one in three (30%) firms increased the number of trainee solicitors they took on. 80% of the top 20 respondent firms have increased the number of trainee solicitors they have taken on over the previous 12 months. 60% of the top 20 firms envisage a further increase in their requirement in the next 12 months, as do more than one in three of all firms surveyed. It is noteworthy, however, that the number of trainees starting PPC1 in 2015 was 388 a similar number to 2014. The profession needs to start attracting more undergraduate entrants to careers in law as demand for trainees from law firms continues to increase. It is noteworthy that there are 200,000 less people in their 20s in Ireland than in 2008 due to emigration and demographic factors. The number of graduates/trainees retained post qualification has increased in the past 12 months for 22% of all firms (60% of top 20 firms). This is another indication of firms increased workload and the difficulties they face in recruiting staff in the current marketplace.
Survey of Irish law firms 2015/2016
25
Succession planning It is important to recognise that almost 90% of law firms have less than five solicitors working in the firm and that 42% of all law firms are sole practitioners. Less than 4% of law firms employ more than ten solicitors. Approximately 28% of all practising solicitors are over the age of 50. Our survey suggests that there is little formal succession planning among many law firms. Two in three firms have informal or no processes for entry to partner level. One in five firms surveyed have formal succession planning in place for impending partner retirements. The lack of formal succession planning in firms can lead to a lot of uncertainty and result in talented individuals with partnership potential leaving firms. It is essential for firms to clearly identify future partners and career paths for such talented individuals and not lose them in the current marketplace where opportunities are now available. Where there is no succession planning, the hand over of clients is often left until the last minute and the business put at risk. As partners prepare for retirement, firms should be investing in a smooth transition process to reduce the risk of losing and damaging important client relationships. The successful introduction of new partners to clients takes time and requires sensitive management. Coaching and mentoring of new partners is vital. The ticking time bomb of later partner retirements as a consequence of the recent recession, combined with insufficient pension funds or planning will no doubt cause tensions and growing headaches for firms if not dealt with. Succession planning should come out of the firm’s overall strategy as a by-product of the firm’s future talent requirements. Firms should plan for key roles that are likely to be vacated, identify who will fill them and if necessary start the recruitment process well in advance. Part of the planning process should involve ensuring partner buy-in to what those future needs will be. Finding the rainmakers of the future with the requisite interpersonal skills may require a change of mindset particularly with the current generation who have grown up communicating principally online.
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Smith & Williamson
Mergers & acquisitions
Mergers & acquisitions Very few significant mergers have taken place in the Irish legal sector over the last five years. The growth of the “Big 5” legal firms has been mainly organic, supplemented by lateral hires, bolt-ons and expansion into international markets. The main objectives of mergers and acquisitions arise from: • • • • •
Paul Wyse
The majority of firms believe the level of merger activity will increase over the next twelve months. This is reflected in the steady increase year on year of firms reporting they have been approached about a prospective merger opportunity.
increasing the client base economies of scale improving profitability expanding service lines succession planning.
The merger and acquisition of partnerships continues to be a difficult route and it is much easier for smaller partnerships to merge or to bolt on small partnerships to a larger organisation. This is evidenced by the fact that there is more merger and acquisition activity prevalent in the UK market where the LLP (Limited Liability Partnership) business model is available. In our view, if firms were permitted to move to a limited liability partnership or incorporation model, merger and acquisition activity in the sector in Ireland would increase substantially. The key factor for any successful merger is that it makes business sense. In the absence of clear strategic drivers, merged firms often find that the anticipated improvement in financial performance is hard to achieve in practice. It is important that firms clearly articulate the anticipated benefits of merger from the outset and identify potential barriers to success early in the process. For many firms, a merger or acquisition, or even making lateral hires, is the logical progression to expand and develop services and new practice areas. This is also a more immediate approach than organically growing the necessary resources and developing the skillsets necessary by a firm on its own to tackle a particular sector, a new market segment or area of law. Some fundamental obstacles hinder successful consolidation by merger. These include: • • • • • •
profitability differentials compensation model differentials premises issues rationalisation and integration costs cultural differences management structures and capital management issues.
Cultural differences are often cited for failed merger negotiations but in reality it is often the lack of perceived benefit or the unwillingness of management to proceed against a backdrop of risk aversion from their partner group. Basic principles and commercial issues need to be addressed and confronted as part of any discussions to support and deliver the business case for a successful merger. The real work and ultimate success of a merger comes post completion as significant effort in post deal integration is required to deliver the benefits envisaged.
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Smith & Williamson
Survey results 58% of firms surveyed (73% of the top 20 firms) expect the level of merger activity 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 remained fairly constant at one-in-four firms. This contrasts with the number of firms who have been approached with a view to a potential merger or team acquisition in the last two years at 37%. 28% of firms surveyed (53% of the top 20) believe the partnership business model restricts a firm’s ability to merge with or acquire other law firms, clearly impeding consolidation.
Expectations on levels of merger activity
Increase
63%
51%
58%
73%
Remain the same
34%
36%
32%
27%
Decrease
1%
5%
2%
0%
Don’t know
2%
8%
8%
0%
2013
2014
Top 20
2012
Has your firm been approached by another firm with a view to a potential merger in the last two years? Yes
32%
43%
37%
67%
No
66%
57%
62%
33%
Refused
2%
0%
1%
0%
2013
2014
2015
Top 20
Lateral hires taken from other firms in the past year
Survey of Irish law firms 2015/2016
2014
2015
Top 20-2015
0
63%
60%
8%
1–3
22%
24%
13%
3–5
4%
7%
33%
5 – 10
5%
2%
13%
More than 10
4%
6%
33%
Don’t know
2%
1%
0%
29
Marketing and business development
Smith & Williamson
Marketing and business development With evidence of increasingly competitive market conditions, firms are engaging in diverse marketing strategies. Partner performance measurements are also more aligned with client retention, new business wins and business development activity levels featuring strongly.
Increased marketing efforts
Marc Lowry
The trend of increased focus on marketing and business development continues with spending rising over the last 12 months on the back of increased firm turnover.
With 61% of firms claiming to have increased their business development and marketing efforts over the last 12 months and 45% claiming to have increased their marketing spend, it is clear the majority of firms plan to grow their business. Evidence of the competitive landscape heating up is contained in our survey results. There has been a substantial increase in the marketing and business development spend year on year, up to 3.44% of turnover in 2015 compared with 2.4% in last year’s survey. The top 20 firms spend more of their turnover (4.6%) on marketing. Also 87% of these top firms report that they have increased their spend over the last 12 months, nearly double the percentage of mid-tier and small firms.
Reported % of firms who increased/decreased marketing spend in the last 12 months 2013
2014
2015
Top 20-2014
Top 20-2015
Increased
25%
39%
45%
50%
87%
Remained the same
67%
51%
50%
44%
13%
Decreased
8%
10%
3%
6%
-
Don't know
-
-
2%
-
-
Strategies employed by firms The evidence from our survey is that firms are primarily pursuing classic “market penetration” strategies. The marketing cliché goes that it is far easier to win business from those who already know you. However, with 57% of firms reporting increasing competitive pressure in the sector it is clear that growth through expanding existing client relationships is becoming increasingly competitive. Evidence of this competition is contained in reported pricing strategies where 64% of respondents to our survey cited the use of fee mechanisms such as discounting or taking increased price/cost risk through fixed fees as a means to improve performance.
Existing
New
Market penetration
Product development
Market development
Diversification
New
Markets
Existing
Products
Survey of Irish law firms 2015/2016
In this increasingly competitive market firms are looking to marketing strategies for growth. As a result 52% of firms state they are targeting new markets with their suite of services. It is worth noting also that 39% of firms are introducing new services to yield additional revenue from existing and new clients.
31
Business development and marketing strategies employed by firms in the last 12 months 2012
2013
2014
2015
Top 20-2014
Top 20-2015
Increased sales/marketing efforts
54%
66%
64%
61%
88%
87%
Discounted/reduced fees/agreed to more fixed fees
71%
81%
70%
64%
-
73%
Targeted new markets
51%
67%
59%
52%
100%
80%
Introduced new services
37%
57%
48%
39%
75%
73%
The activities firms report spending their money and resources on reflect the traditional and proven sector approaches. Is it because these approaches are safe and believed to be effective? New approaches are emerging and our survey reveals that efforts in the digital marketing domain remain a source of concern and conservatism. There is however a change in attitude to digital social media where the majority industry view now is that these tools are seen as primarily for marketing.
Performance and partner expectation It is clear that focus and investment has increased year on year on business development and marketing in the legal sector. So what lies beneath the surface of bullish spending and diverse business development strategies? Are we seeing a culture shift in professional services? We asked survey respondents to give us the key measures of partner performance measured in their firm.
Principal measures of partner performance
52%
New business wins
60%
Client retention
22%
Business development activity levels
Marketing and business development are front and centre with client retention (60%), new business wins (52%) and business development activity levels (22%) reported by firms as being the top three principal measures of partner performance.
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Smith & Williamson
IT investment and social media
IT investment and social media We are all aware of the rapid and seemingly all pervasive adoption of social media and digital by organisations in consumer markets. Mega brands like Virgin Media (formally UPC), Airtricity and Aviva have interactive websites, online billing and Facebook pages. The same cannot be said for professional services, particularly the legal sector, where social media and online customer service has been mainly ignored or, even more worryingly, considered dangerous or inappropriate. The legal sector clearly recognise that with growth comes the need for investment. It is seen as increasingly important and warranting investment in the short and medium term. Firms report spending on IT to be 4.9% of turnover, up slightly on the 4.7% reported in our 2014 survey.
Last 12 months - A period of investment Marc Lowry
While there is still a solid cohort of digital adopters within the legal sector, the late adopters have not moved in the last 12 months and are getting left further behind as they fail to grasp the digital opportunity.
Significant additional investment occurred in IT over the last 12 months with 83% of all firms surveyed reporting that they invested in their IT systems. This is against a backdrop where 54% of all firms surveyed in 2014 stated that they were going to invest in their IT systems in 2015. Large firms are consistent; 93% of them said they would invest in 2015 with 93% reporting they actually made IT investment in the last 12 months. So is there a strategic gap with medium and smaller firms? In our view there is a reactive stance by smaller firms to such IT investments. A passive strategy leaves firms open to making poor investment decisions, falling behind and even potentially paying over the odds when they are forced by system redundancy or market changes to eventually have to make investments.
Looking forward Planning future investment in IT systems and upgrades is becoming more critical for law firms and these investments are more strategic in nature. In 2014 two in three respondent firms told us that investment in IT was an immediate or medium term priority for them. Nearly a quarter said it was not a priority. In 2015, the intention to invest is up significantly with 73% of firms giving IT investment a medium term or immediate priority. The number of firms who don’t see it as a priority is down in 2015 to less than a fifth of firms. Equally, firms see these investment decisions as more immediate with 60% of firms planning IT investment in the next 12 months. The upswing in IT investment appetite is primarily reported by medium and smaller firms. 93% of the top 20 firms plan IT investments in the next 12 months, a similar level to last year. Large firms are generally taking the longer-term view, looking at a three-year payback timeframe on such investments. Smaller firms tend to plan in the shorter term and view such investments within the annual budget cycle. Reactive strategies emerge with consequential unplanned expenditure, overruns and systems that may meet immediate but not long term needs.
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Smith & Williamson
Why invest? Efficiency and security! There is more clarity this year in the sector around why this IT investment and spending is necessary. Historically firms invested in IT to improve their record keeping and administration. In 2015, 68% of firms increased their investment in IT in order to achieve greater efficiencies. A further 14% listed security concerns as the reason for their increased investment in IT. One in five firms (and one in three of the top 20 firms) have been the subject of cyber-attacks in the last 12 months. In 2015, the focus is on delivery of greater efficiency as the key consideration (68%) and security a distant second (14%).
Reasons for investing 80%
2014
70%
2015
60% 50%
2015 (Top 20 firms)
40% 30% 20% 10% 0% Improved Improved record To keep up to Greater record management for date with others Efficiency management administrative in the legal for legal functions profession cases
Security
advanced Improve software service to and case clients/added management value/faster system service
Other
Are firms overcoming concerns and perceptions of social media? Our 2014 survey clearly indicated that professional service firms do not in the main use online and social media tools. Legal professionals and firms continue to be cautious according to our 2015 survey results. Forward-thinking law firms continue to make social media work for them and are reaping the benefits, however levels of adoption year on year remain consistent and relatively low. The exception is having a website with 45% of firms having a presence online (73% of larger firms). We reported in 2014 that firms have a number of concerns preventing progress in the digital space. Importantly in 2015 only 26% of firms think that social media is not a suitable communication channel for the legal profession compared with 48% in our survey last year. So attitudes are shifting rapidly while adoption has not yet kept pace. In 2015 one in three firms surveyed maintain they don’t use any form of social media (46% in 2014) (8% of the top 20 firms). The overall figures for digital social media usage around LinkedIn (52%), Twitter (16%) and Facebook (11%) are substantially in line with last year.
Survey of Irish law firms 2015/2016
35
As we highlighted last year, international studies have found that firms who embrace social media win new clients, develop more closely knit relationships with their existing client base and are able to develop a far higher and more effective media profile*. 2014
2015
50% 40% 30% 20% 10% 0%
Own Website
None/No social media sites
Social media – a digital revolution? While there is still a solid cohort of digital adopters within the legal sector, the middle and late adopters have not moved in the last 12 months and are getting left further behind as they fail to grasp the digital opportunity. So, is there evidence that digital and social media is gaining traction? Marketing is still cited as the main driver for use of these digital tools. One noteworthy result from our survey suggests that use of digital as a recruitment vehicle is down from 20% in 2014 to 1% this year.
Why firms report they use social Media 60%
All firms
50%
20 firms
40% 30% 20% 10% 0%
As a marketing tool
To generate To develop free new clients client info services
Develop For HR/ professional network Recruitment
A number of reasons for the continued tentative use of social media may be in the minds of respondents. • • • • •
he perceived risk of reputational harm. T No internal resource to manage digital. Confusion or lack of skill or know-how. No clarity of the business value or objective. Outside of the comfort zone of traditional marketing and business development.
Having chosen the digital strategy in which you want to invest, it is vital to ensure you resource it, plan it, and above all be disciplined about it.
*IDC report #247829 - April 2014
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Smith & Williamson
Security concerns – Cyber-attack!
An increasingly digital environment in an interconnected world means law firms need to be more sophisticated about how they protect both client and indeed their own data.
One in five firms have been subject to cyber attacks in the last 12 months (one in three of top 20 firms). One critical topic that has emerged from this year’s survey has been that of cyber security. “Solicitors are particularly valuable targets for cybercriminals due to the maintenance of substantial sums of monies in their client accounts”, according to Rory O’Neill, an investigating accountant with the Law Society . Further in the same article he states that, “The Law Society is aware of a number of attempts to gain fraudulent access to client monies”. Some solicitors have had funds fraudulently removed – in one case substantial funds*. Cyber security is not just about IT, its domain incorporates people, processes, practice and organisational norms and culture. Risks of reputational damage and client expectations of security and privacy are extremely high. It is clear that there is increasing focus on this area with regular media reportage, high profile data leaks and incidents of system and data hacks. Although regulatory requirements are de minimus, there is an expectation that firms will keep pace with and have adequate defenses and controls in place to mitigate these risks.
Cyber attack? Our survey reveals the following:
20%
of firms surveyed report their systems have been subject to cyber-attacks in the last 12 months
33%
of large firms have been subject to cyber-attack in the last 12 months
16%
of firms expect to benefit from increased security by investing in their IT infrastructure
21%
of large firms expect to benefit from increased security by investing in their IT infrastructure
Increasing IT investment by legal firms is evident from our survey results. These investments will bring an increased reliance on information technology, systems and processes. This increasingly digital environment in an interconnected world means law firms need to be more sophisticated about how they protect both client and indeed their own data. The importance of up-to-date online security cannot be over emphasised and particular care should be taken if unsolicited emails are received requesting information about bank accounts.
* Law Society and Report 2014/15
Survey of Irish law firms 2015/2016
37
The Legal Services Regulation Bill and the Court of Appeal
Smith & Williamson
The Legal Services Regulation Bill Minister for Justice and Equality (the Minister), Frances Fitzgerald TD, has indicated that the long-awaited legislation to reform the legal profession will be enacted by the end of 2015. The legislation was passed by the DĂĄil in April 2015 and completed the Seanad second stage in May 2015. However, our survey results indicate that one in three firms do not expect the Legal Services Regulation Bill (the Bill) to be implemented within the next twelve months.
Expected timeline for implementation of the Legal Services Regulation Bill
Dan Holland
One in three firms do not expect the Legal Services Regulation Bill to be implemented within the next 12 months despite government commitments to implement this year.
2015
Top 20-2015
1 – 3 months
6%
7%
4-6 months
19%
27%
7-9 months
14%
7%
10 to 12 months
9%
7%
>12 months
32%
33%
Don’t know (DNRO)
20%
19%
Originally published almost four years ago the current version of the the Bill has been described in the media generally as a diluted version with 235 amendments to the original. It will likely face further amendments at the Seanad committee and report stages. The Bill continues to be viewed as a very important issue for the profession and one in four firms surveyed (mainly smaller firms) have stated it is a key issue facing the legal sector over the next twelve months and one in five firms suggest it is the single biggest challenge facing the legal sector in the next five years. The original draft legislation elicited strong commentary from both the Bar Council and the Law Society in recent years, specifically with regard to the independence of the proposed independent Legal Services Regulatory Authority (the Authority) and the possible negative economic impact on the legal profession. These concerns were evident in the results of our surveys in recent years when respondents cited pressure on fees, increased cost of delivering legal services and dissatisfaction with the proposal of multidisciplinary practices as potential negatives. Some of the key amendments to the original version include dropping the proposed involvement of the Minister in the appointment of staff to the Authority and dropping the proposal for government to appoint members of the disciplinary tribunal. In addition, the Authority will now be required within six months of being created to issue a report on multi-disciplinary practices. A period of public consultation will then follow with a final report required to be issued by the Authority to the Minister who will then decide if these new type practices will be permitted.
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One of the main points of concern for the legal profession surrounding the Bill continues to be the proposal for one-stop-shop/multidisciplinary practices. When asked in our survey if they were in favour of these multidisciplinary practice proposals, a significant 62% of respondents (87% of the top 20 firms) said no. When those who answered no were asked what specific issue they had with these proposals, 15% indicated they felt it would result in potential conflict of interest/ethical issues and 14% felt it would restrict access to legal services.
Are you in favour of the one-stop-shop/multidisciplinary practice proposals in the Bill? 2012
2013
2014
Yes, in favour
33%
30%
13%
No, not in favour
66%
62%
87%
Don’t know
1%
8%
0%
The other change suggested most by firms surveyed was the inclusion of provisions for limited liability partnerships. It is important to remember that concerns over how clients would respond to firms taking steps to limited liability proved unfounded in the UK when LLP’s were introduced. The introduction of LLP’s also increased consolidation in the UK market with circa 25 mergers per annum among the top 100 firms. One of the key concerns expressed by the European Commission in its economic report on Ireland published in June, was that the cost of legal services had failed to adjust downwards since the onset of the financial crisis, in part due to insufficient competition. This is a view the legal sector fundamentally disagrees with as more fixed fees are agreed for work and there is greater competition around pricing generally in the sector. Undoubtedly, one of the main aims of the Bill is to address this issue and to ultimately lead to reduced legal services costs. In last year’s survey 78% of respondents stated that they did not think that the Bill will reduce costs for clients and 72% of respondents felt that the Bill would lead to increased costs for legal firms. Whether the concerns of the legal sector are justified will only become evident once the long-awaited Bill is enacted. When survey participants were asked what changes they would like to see to the Bill, the most common response was the introduction of limited liability partnerships. Such a move would bring the legal profession in line with other businesses and with the UK. A Department of Justice spokesperson was quoted recently in the Irish Times as saying “It is the intention that the Legal Services Regulation Bill will be completed so that the new Legal Services Regulatory Authority can come into operation without delay this year”. It will however, in our opinion, take some time for this Authority to become established. It certainly appears that consultation with the key stakeholders continues and most legal sector commentators expect further amendments before the Bill is enacted.
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The Court of Appeal The new Court of Appeal was set up to have a significant impact on the practical operation of the Irish Court System, particularly in terms of reducing waiting periods and improving overall efficiency. The historical bottleneck structure that had 36 judges of the High Court with only one or two panels sitting at Supreme Court level was always going to result in significant delays. This situation was unsustainable and untenable. The new Court of Appeal has disposed of 748 appeals in the 9 month period to 31 July 2015. This Court inherited circa 2,000 civil and criminal case appeals. It has taken on 750 new appeal cases since it was established. Of the 897 criminal case appeals (new and transferred) it has taken on, it has disposed of 280 and all cases ready for hearing are listed next term. The court has disposed of 273 civil case appeals transferred to it and 195 new civil case appeals in this period.
Dan Holland
The Court of Appeal sits between the High Court and Supreme Courts and held its first sittings in November 2014. 90% of survey respondents believe the new court is delivering or exceeding the impact envisaged.
Survey of Irish law firms 2015/2016
What our survey reveals The establishment of the Court of Appeal is seen as highly positive by 78% of firms surveyed (in our 2014 survey) who believed it would help Ireland’s international reputation. It has started to ease the previous four-year backlog of cases, which was a source of embarrassment internationally. It is pleasing to state that in this year’s survey, most firms surveyed (90%) believe that the new Court of Appeal is delivering or exceeding the impact it was envisaged it would have. Only 10% of firms surveyed (27% of top 20 firms) believe it has made an impact less than that envisaged. The two areas in which it has made most progress according to firms surveyed are that: 1. It has reduced waiting times for appeals, and 2. It has improved the appeal process. The main area identified by survey respondents for improvement is around case management. The Court of Appeal is a new important element of justice in Ireland, which will not only enhance our reputation internationally for due and efficient process of litigation, but improve the practical functioning of the courts for legal professionals and citizens alike. It is pleasing to see that 90% of law firms surveyed believe the new Court is delivering or exceeding expectations. Clarity around processes and case management is essential for all parties.
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The impact of Brexit
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The impact of Brexit The forthcoming referendum on the EU will be a critical issue not just for the UK but Europe as a whole. There are three key issues to consider: the timing of the vote, the terms on which the vote is held and the ramifications of Brexit. When we consider that 2017 sees both French and German general elections and ironically the UK presidency of the EU the timing of the referendum is a sensitive issue for the whole of Europe. Consequently, a late 2016 vote (getting the referendum out of the way before the French and German general elections) would be the preferable option for most EU participants. David Cameron wants to promote continuation of EU membership conditional on the delivery of new membership terms. The four pillars of the UK’s negotiations are as follows:
Cedric Cruess Callaghan
Almost 1/3 of firms overall and nearly four out five of the top 20 firms in Ireland believe they would be impacted by the UK leaving the EU.
1. A ttainment of greater sovereignty (exempt the UK from the commitment to ever closer monetary and fiscal union). 2. Enhance EU competitiveness by cutting red tape and protectionism. 3. Prevent the EU from isolating the City of London with punitive regulation. 4. Impose controls on migration and the freedom of movement of labour. Some of these terms would require treaty changes which would be extremely difficult to deliver in time for the referendum but a commitment to do so at a later date would be sufficient for Cameron to promote a yes vote. What terms will be delivered? The greatest EU opposition centres around the ‘opt out’ (sovereignty issue) and restrictions on the freedom of movement of labour. However, the UK’s bargaining position has been enhanced by the damage the recent protracted Greek bailout negotiations have had on the eurozone structure and the strains the migration crisis is imposing on open borders. The last thing the EU wants, given its current vulnerability, is the prospect of an economy the size of the UK breaking away, as this could well accelerate anti-EU sentiment in the rest of Europe. With a vocal and well-funded anti-EU lobby in the UK, Cameron is in a strong position to extract concessions. What are the consequences if the UK votes to leave the EU (Brexit)? As the debate heats up we will see an array of both pessimistic and optimistic views. What we do know is that the terms of the UK’s exit will be critical. If the UK leaves the EU but maintains the customs union and access to a single market and pursues an ambitious deregulation policy Open Europe estimate UK GDP will benefit. On the other hand if the EU does not permit preferential trade agreements and seeks to punish the UK in order to preserve the perceived benefits of EU membership, the UK economy will suffer. While the campaign/debate is underway it will inject uncertainty into markets and this could well result in sterling weakness. In a recent study commissioned by the UK Law Society, it was estimated that the UK legal sector could lose between £225m and £1.7bn of yearly output by 2030 if the UK voted to separate from the EU. This is based on the assumption that activity in the City of London and foreign direct investment into the UK will be curtailed.
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During his recent visit to the UK, Chinese President Xi Jinping stated that he wanted the UK to remain in the EU, as he believes the UK has a positive role to play in promoting Chinese relations within the EU. Mr Xi joins other world leaders, including US President Barrack Obama, who have outlined their preference for the UK to remain within the EU. Many countries fear the loss of the free trade influence it brings to the bloc. The initial implications of a Brexit for Ireland revolve around the peace process, with border control issues looming large.
Our survey’s results Most firms surveyed (59% overall and 87% of the top 20 firms) believe that the legal sector in Ireland would be impacted by the UK leaving the EU. Most fear imports and exports with our most important trading partner would be affected. Currently Ireland and Britain exchange over ₏1billion in goods and services every week. Almost one in three (one in two of the top 20 firms) believe that their own firm would be impacted. One in five of all firms surveyed stated all areas of practice would be impacted. The areas most affected according to the top 20 firms would be regulatory, banking and financial services. If Britain was no longer in the EU its legal system could change in the context of financial services as all of the prominent structural legislative frameworks applicable to financial services are EU derived. Ireland’s financial services sector may benefit from foreign banks currently based in London moving to Dublin to ensure full access to the EU is maintained. Almost half of fund promoters that have chosen Ireland as the location for the administration and/or domiciliation of their funds originate from Britain. One in ten of the firms surveyed this year (one in three of the top 20 firms) would be concerned that there would be a reduction in the referral of work/less UK legal activity in Ireland. Our UK survey results show that 60% of firms surveyed think that there would be a negative impact on their firm if the UK left the EU. The view of the Confederation of British Industry is that the knock-on effects of a UK exit from the EU would have a profound impact on the economy and businesses of the UK.
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Tax update – Budget 2016
Tax update – Budget 2016 It is likely that the legal profession are a little disappointed with Budget 2016. There are three primary reasons for this.
Inheritance tax thresholds In their pre-budget submission The Law Society of Ireland called on the Government to “raise the punitive Capital Acquisitions Tax thresholds” in Budget 2016. Indeed similar requests were echoed in the pre-budget submissions of the Consultative Committee of Accountancy Bodies (Ireland) and the Irish Tax Institute. The threshold amounts fell significantly in the years 2009 to 2012. This corresponded with the economic downturn and collapse in property values.
Gordon Hayden
The budget delivers a mixed bag for the legal profession with some swings and roundabout, but did it go far enough?
The Law Society sought an increase in ‘all’ thresholds. In particular, an increase in the Group A threshold (son/daughter) was suggested in the range of €350,000 to €500,000. This is merited when one considers that asset values have been recovering. In Budget 2016 the Minister increased the Group A threshold from €225,000 to €280,000. However no changes were made to the Group B (Parent/brother/sister/ niece/nephew/grandchild) or Group C (Relationship other than A or B) thresholds. The increase in the Group A threshold, while welcome, may well be construed as not going far enough and as not having a meaningful or broad enough application to mitigate inheritance tax on what many would consider modest estates. With the recovery gaining momentum and consequential increases in property values, this problem is going to become even more relevant with a reduction in tax rates and/or further increases in the threshold becoming a necessity in the short term.
Universal Social Charge In recent years professionals have expressed concern at the Universal Social Charge (USC) surcharge of 3% applying to the self- employed. The self–employed know only too well that if you earn in excess of €100,000 the 3% surcharge applies. The surcharge does not apply in the case of an employee, thus there is an apparent mismatch in treatment. In advance of Budget 2016 it is likely that self-employed legal professionals would have hoped for a level playing field in that the 3% surcharge would be curtailed or abolished. While there have been positive changes in terms of USC (discussed below) unfortunately no change has been made in relation to the 3% surcharge. Thus the mismatch between employed and self-employed continues.
Earned income credit On a positive note the Minister took the first steps to bridging the gap in tax credits between employees and the self-employed with the introduction of an earned income tax credit of €550. This credit is to be available to taxpayers earning self-employed trading income or professional income and to business owner/managers who are ineligible for a PAYE credit on their salary income. An employed person is eligible for a PAYE credit of €1,650 per annum. Parity has not been achieved and the self-employed will be disappointed with this. However it appears this is the first phase in bridging the gap with an increase in the credit likely in 2017 and 2018.
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Personal tax Reduction in USC rate The 7% rate is reduced to 5.5% on income between €18,669 and €70,044. This produces an annual saving of circa €771 for those subject to USC on such income. This effectively reduces the marginal rate to 49.5% for earners with income of up to €70,044.
Pension levy The pension levy of 0.15% will expire at the end of 2015.
Capital gains tax A new capital gains tax rate of 20% will be introduced to apply to the sale of whole or part of a business applying to capital gains of up to €1,000,000.
Conclusion While the Budget may not have delivered for all on an immediate basis there is a sense of balance having regard to the overall economic position. Notwithstanding an imminent election, the government has resisted the political pressure to introduce greater tax cuts and large increases in public spending. In the interest of a controlled and measured return to economic prosperity this appears to be a sensible approach, although an unwelcome one for those still suffering a marginal tax rate of well over 50%. Hopefully this budget is the start of a series of budgets which will focus on reducing the marginal tax rate to below 50% for all taxpayers and also in reducing the capital tax burden by reducing the tax rate from 33% and by increasing all Capital Acquisitions Tax thresholds. For a more comprehensive overview of our Budget 2016 coverage please visit our website: www.smithwilliamson.ie
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Dublin professional practices team
Tel: 01 6142528 Email: liam.dowdall@smith.williamson.ie
Paul Wyse
Marc Lowry
Tel: 01 6142504 Email: paul.wyse@smith.williamson.ie
Tel: 01 6142546 Email: marc.lowry@smith.williamson.ie
Dan Holland
ﾃ（ne Reidy
Tel: 01 6142511 Email: dan.holland@smith.williamson.ie
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Liam Dowdall
Tel: 01 6142573 Email: aine.reidy@smith.williamson.ie
Cedric Cruess Callaghan
Frank Brennan
Tel: 01 5006523 Email: credric.cruesscallaghan@smith.williamson.ie
Tel: 01 5006528 Email: frank.brennan@smith.williamson.ie
Seﾃ｡n McNamara
Derek Ryan
Tel: 01 6142621 Email: sean.mcnamara@smith.williamson.ie
Tel: 01 5006527 Email: derek.ryan@smith.williamson.ie
Gordon Hayden
Liz Cahill
Tel: 01 6142592 Email: gordon.hayden@smith.williamson.ie
Tel: 01 6142525 Email: liz.cahill@smith.williamson.ie
Smith & Williamson
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