A significant shift is underway among larger law firms as they move away from traditional partnership structures. This change is primarily driven by the need to access external funding, according to a recent report.
The research conducted by Evelyn Partners, in collaboration with The Lawyer, surveyed over 230 senior legal professionals, primarily partners, revealing that 46% of firms viewed enhancing their ability to raise external funds as the main motivation for transitioning away from LLPs. Additionally, firms aimed to improve governance and decision-making processes and manage funds more tax-efficiently, with 42% of respondents citing these as key factors.
Competitive pressure is another significant factor influencing this transition. The report highlights that 76% of firms experienced increased competition over the past year, a noticeable rise from the previous year. Direct competitors, niche law firms, and international firms are identified as the primary sources of this competition, alongside a rising challenge from online service providers, which now equates to the competition posed by in-house legal departments.
The challenges faced by law firms are not limited to structural change. Attracting and retaining qualified personnel, coupled with the adoption of innovative technology, represents the most substantial challenges. Furthermore, there is increasing pressure on fee structures, necessitating strategic adaptations.
Despite these challenges, the prospect for law firms remains optimistic. An overwhelming majority, 96%, express confidence in the business outlook, with a growing number feeling ‘very confident’. This optimism is partly fueled by the opportunities presented through investment in technology, attracting lateral hires, and adapting to new working methodologies.
In terms of future funding strategies, while improving lock-up and utilising bank funding and partner capital remain primary focuses, there is a gradual shift towards considering external investment and specialized law firm funding. This shift is seen as essential for driving innovation and facilitating growth, particularly in adopting advanced technologies such as AI.
With regard to merger and acquisition activities, the report finds stability in intentions, with a small percentage, 4%, planning to merge with similar or larger firms, and 17% considering acquiring smaller firms. Key drivers for such strategies include developing specialist practice areas, geographic expansion within the UK, and diversification.
Cybersecurity remains a high priority for law firms, with three-quarters expressing confidence in their defences. However, the increasing sophistication of cyber threats poses significant challenges, with 78% highlighting the complexity of legal data and digital systems.
In conclusion, the evolving landscape for law firms, driven by the need for external funding and competitive pressures, is prompting a reevaluation of traditional structures and strategies. These changes reflect a forward-thinking approach to ensure financial flexibility, technological advancement, and geographic and practice area expansion.
This transformation represents a forward-thinking strategy to remain competitive and sustainable in a dynamic legal environment, underscoring the necessity of adapting to evolving market demands.
