Annual Survey of Irish Law Firms 2018/2019€¦ · Last year many law firms were concerned that levels of growth would not be sustained in 2018. Nearly half of the firms surveyed

Annual Survey of Irish Law Firms 2018/2019

Confidence, growth and the battle for talent.

Survey Methodology

Our national survey was carried out through telephone research interviews in September and October 2018. 123 Law firms took part in the survey this year, our largest participant number to date (115 in 2017). The survey seeks to review current attitudes, and enquire about key issues and market sentiment in the legal sector. Typical respondents are managing partners or a senior partner.

CONTENTSIntroduction 4

Executive Summary 5

Survey Highlights 8

Outlook for the Legal Sector 11

Firm Performance & Key Issues 17

Talent, Training & Development 23

IT Investment & Cyber Security 29

Mergers & Acquisitions 35

Brexit: The Uncertainty Continues 41

Dublin Practices Professional Team 47

Total number of firms surveyed:

123Dublin Firms

60%

Regional Firms

40%

Interviewees Managing Partner 71%Senior Partner 27%Functional Head 2%

Survey in NumbersTop 20 firms 15Mid-tier firms 31Small firms 77

4

Smith & Williamson | Annual Survey of Irish Law Firms 2018/2019

A Commitment & Investment in Ireland

This has been an important year in Smith and Williamson’s 60-year history in Ireland. Our merger with leading Dublin-based accountancy firm LHM Casey McGrath in October has positioned us in the top tier of accountancy and financial services businesses in Ireland. It will enable us to build on our lengthy heritage and expertise in accounting, tax and investment management to deliver the strongest possible advice to our clients.

Our professional practices team provides specialist accounting, tax, advisory, mergers and acquisition and succession planning services to Irish legal firms and professionals. The Annual Smith & Williamson Irish Law Firm Survey highlights our commitment to the legal sector in Ireland, aiming to build understanding and facilitate best practice.

The survey has become a key annual highlight, delivering insights into the sector’s outlook and attitudes, performance and opportunities, talent and reward. I wish to especially thank the partners in legal firms who gave their time and participated in the survey. I also thank Amarach Research for its independent work in conducting the research for this survey. I believe it delivers real insight into the way legal firms in Ireland are operating today.

Paul Wyse Managing Director, Dublin Office

This is the seventh Annual Smith & Williamson Irish Law Firm Survey. We deliver key insights into sector outlook and attitudes, performance and opportunities and talent and reward.

PAUL WYSEManaging Partner

60 years’

operating in Ireland

TOP

Accounting Firm in Ireland

10

5


Executive Summary

There is concern about the next 12 months as the sector faces into the outcome of Brexit negotiations between the UK and the EU and whether Theresa May can deliver a deal acceptable to the UK Parliament. This uncertainty is fuelling concerns in the legal sector as clients of firms and certain transaction services could be impacted by any lack of, or knocks to, business confidence.

This year’s survey shows a continuing level of confidence in the legal sector, with revenues and profits rising for the majority of firms and many anticipating a strong year ahead. Below the surface, however, the picture is not quite so rosy. Growth rates are slowing, margins are under pressure and there is an increasingly competitive market for talent. Pay increases of more than 5% were experienced by most Top 20 firms and by 4 in 10 firms generally. Challenges and issues for the legal sector include the increasing footprint of UK and international firms, Brexit, cybersecurity and disruptive technologies.

The market for lateral hires is buoyant, while the long promised LLP structure may help facilitate consolidation through merger and acquisition activity. Investment in technology is helping improve working practices and client service and will be another important tool for law firms to recruit and retain staff in an increasingly tightening labour market. At the same time, over half have prepared a Brexit strategy, designed to help them deal with – or even capitalise on – the issues raised by the UK’s departure from the European Union.

The key problem is that these responses are not evenly spread. Smaller firms are under-investing in technology, opening up a meaningful gap with their larger peers and making them less competitive. Equally regional firms are finally seeing benefits of the rising economic tide but trail Dublin firms in IT investment, pay and scale. This leaves certain sector players poorly prepared for the challenges of the next decade. The outlook for the sector as a whole

is anticipated growth, but some firms may find they are not able to participate or capitalise as expected.

Sector Outlook

The outlook for the sector as a whole remains positive, with 60% of firms reporting increased profits in 2018, and many anticipating positive growth in 2019. However, growth rates are slowing. There is a more cautious sentiment among the Top 20 firms with 40% anticipating an improved outlook for the next 12 months, a slight increase on the 33% last year, and 20% expecting deterioration in outlook for the legal sector. It may be that these firms are more concerned about the challenges that lie ahead, anticipating less growth than in recent years. Certainly, larger firms appear better prepared, in terms of investment in people, technology and planning, than many of their smaller counterparts.

Last year many law firms were concerned that levels of growth would not be sustained in 2018. Nearly half of the firms surveyed last year anticipated that it would be a relatively stable year for performance. It is pleasing to report that our survey results this year indicate the last 12 months have continued to show growth in revenues and profits in most firms surveyed and in particular the Top 20 firms.

buoyant

The

outlookfor the sector as a whole is

6


Firm Performance, Lock-up & Working Capital

Revenue growth remains strong in the legal sector as a whole with nearly seven in ten firms enjoying increased revenues and 80% of the Top 20. Of those firms 35% (42% of Top 20) saw increases in their revenues by more than 10%. 60% of firms enjoyed increased profits and, of these firms, 37% (33% of Top 20) enjoyed profit growth in excess of 10%. While top-line growth has remained strong this hasn’t necessarily translated to the same levels of growth in profits. Margins are being squeezed through increased overheads primarily driven by office space costs and wage increases.

Lock up remains a structural barrier to investment for many firms. The pressures on legal firms reported on in our 2017 survey have not subsided, including rising staff costs, investment in technology and IT security. The failure to address debtors and work in progress leaves many firms having to increase equity in the firm and /or increases in bank borrowings reducing the capacity to invest in people and technology.

Talent, Training & Development

Recruitment and retention of staff remains a key priority for the profession, with nearly one in two - and four in five of the Top 20 firm - respondents highlighting it as a top issue facing their firm. With 40% of solicitors aged 39 or less, the need to deal with millennial expectations, including working hours and flexibility, in addition to increasing competition from opportunities for in house positions, results in is a greater necessity for successful staff retention strategies.

The increasing scale of large firms and the establishment of new greenfield set ups from UK headquartered firms, keen to hire domestic talent, is creating greater competition for solicitors. Over 50% of Top 20 firms (25% of all firms) believe lateral hires are a key opportunity for them over the next 3 years, but this approach is also inflating salaries and making retention more difficult. Pay increases in the sector continue to outstrip inflation by some margin as firms are forced to defend themselves against lateral hires and pay top rates to attract and retain talent. The Top 20 firms continue to provide pay increases above the sector in general with three in four of these firms awarding 6%+.

At the same time, the landscape is changing. There are more female solicitors, for example, with different expectations of working conditions and practices. Firms must increasingly compete with in-house and public sector positions, where working arrangements are more flexible. With this in mind, law firms and their management committees need to consider their staffing requirements

60% of firms reported increased profits

in 2018

of Top 20 firms believe lateral hires are key over

the next 3 years

carefully and give potential recruits clear and compelling reasons to join and stay. Sourcing, hiring, training, developing and retaining quality individuals is the key to survival, future growth and success. With 52% of the profession now female, there are more opportunities at senior levels with women representing 46% of salaried partners and 30% of equity partners in the Law firms surveyed.

The training of solicitors is under review by the new Legal Services Regulatory Authority (LSRA). We sought the views of firms as to whether they considered the training of solicitors is fit for purpose. 55% of respondents believe it is. Of the 45% who believe it is not fit for purpose they see the current training regime as too general, not practical or reflective of the job. The Law Society has engaged leading experts and produced a significant report reviewing this area with a view to implementing improvements recommended.

OVER

50%

7


Brexit

As the Brexit negotiations drag on, our survey found that 55% of all respondents are more concerned about the impact of Brexit than 12 months ago. However, looking to their own business, firms are divided whether Brexit will ultimately prove to be an opportunity or a threat.

Around one third of the Top 20 firms surveyed see Brexit as one of the biggest challenges to their firm over the next 3 years, with three in five firms believing it will pose a threat to revenues and profitability in the short or medium term. Around half of the Top 20 have prepared a Brexit strategy and three quarters have already executed their plan. These are companies with an international client base and the threat is tangible. Among firms in general, with greater relative domestic exposure, concern drops significantly. Uncertainty has led to inertia, which is understandable, however there is still a pressing need for law firms to carry out a Brexit impact assessment on their services, their client base and their key individuals to ensure that they are not vulnerable to losing clients or staff losses. To our mind, it is apparent that there will be opportunities arising from Brexit for those firms that are most prepared.

Information Technology

IT investment has been trending up since we first looked at this area in 2014 but reported investment as a percentage of turnover was well below trend for 2018. Only 13% of firms report that IT investment is an immediate priority in the next 12 months as against one in three of the Top 20. A notable gap is opening between big and small firms, with Top 20 firms investing more than smaller firms by some margin. This is particularly the case in areas such as document management, client service initiatives and remote working, where under-investment by smaller firms may result in a loss of competitive edge. Overall our analysis indicates that the tightening labour market is focusing firms IT solutions that deliver efficiencies and replace labour intensive and repetitive tasks to drive productivity.

Cybersecurity continues to rise in importance for law firms with 79% of firms (73% of Top 20) reporting it as their top issue in 2018 compared to 70% of firms in our last survey. The UK ransom attack on a large law firm, in June 2017, was an alarm call for all law firms.

Few firms are exploring cutting edge technology such as artificial intelligence. For many, the technology is too young, and the commitment in terms of cost and implementation too high. It remains one to watch for the future, but few firms see the need for immediate investment.

M&A

Significant mergers in the Irish legal sector have been few and far between over the last five years. Most of the mergers have involved smaller firms, often designed to deal with effective succession or to deliver scale in a particular specialist area. The growth of larger legal firms has been mainly organic, supplemented by lateral hires and expansion into international markets.

Firms see increasing their scale as the main driver of considering M&A (79%) with Diversification of legal services, new service models and geographic expansion as prime motivators. Brexit is however the key driver of activity with 60% of the Top 20 firms reporting they have been approached in the last 12 months by a UK firm with a view to merger or representation agreements.

We know that many discussions continue to take place, but few mergers come to fruition. The structure of Irish law firms remains a significant barrier and without changes, M&A activity will continue to be limited and piecemeal. It is our view that over time the introduction of the LLP model will increase M&A activity in the legal sector as the partnership business model restricts a firm’s ability to merge with or acquire other law firms.

60% of Top 20 firms

believe Brexit will pose a

threat to revenues and

profitability

8


Survey Highlights

More than 2/3 of firms feel the general business landscape has improved over the last 12 months.

More than half of firms expect the outlook for the legal sector in Ireland to improve in the next 12 months.

Top 20 Firms are more pessimistic for the sector with 60% believing the outlook will remain stable or deteriorate over the next 12 months.

Outlook

Revenue growth remains strong in the legal sector as a whole with nearly seven in ten firms enjoying increased revenues and more than one in three report revenue increases of more than 10%.

60% of firms reported increased profits in 2018 - 37% of these reported an increase of more than 10%.

Margins are being squeezed through increased overhead primarily driven by office space costs and wage increases.

Lock up remains a growing issue with 36% of firms reporting WIP greater than 121 days (27% of Top 20) compared with 24% last year.

Performance

Over 50% of Top 20 firms (25% of all firms) believe lateral hires are a key opportunity for them over the next 3 years.

73% of Top 20 firms, 41% of all firms have had 6%+ pay increases in the last 12 months.

37% of non-Dublin firms awarded no pay increases in the last 12 months compared with14% of Dublin firms.

People

9


1/3 of Top 20 firms reported they made between 6 and 10 lateral hires in the last 12 months.

With more than half of the profession being female, survey respondents indicated that 30% of equity partners and 46% of salaried partners in firms are female.

Partner performance is increasingly focused on new business won (43% of all firms and 67% of Top 20 firms).

Recruitment and retention is the key challenge facing firms over the next 3 years.

Most firms saw an increase in staff numbers in the last 12 months and most expect to increase staff numbers again next year.

People cont.

55% of all respondents are more concerned about the impact of Brexit than 12 months ago.

Two in three Top 20 firms see Brexit as an opportunity to expand their client base as opposed to one in three of all firms.

Brexit is the key driver of M&A engagement with 60% of the Top 20 firms reporting they have been approached in the last 12 months by a UK firm.

Brexit

60% of Top 20 firms have been approached by UK firms with a view to M&A up from 44% in 2017.

Four in five firms see increasing their scale as the main driver of considering M&A and lateral hires.

Mergers & Acquisitions

Cyber-attacks continue to increase with Cyber-security is the key IT issue for 79% of firms (73% of Top 20).

IT

2/3 Top 20 Firms (1/3 of all firms) report being subject to Cyber-attack in the last 12 months.

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 focusing 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.

Dedicated Professional Services Team

We have built a dedicated team centred on providing a quality service to our growing list of legal firm clients. Based in Dublin, our professional practice team delivers tailored solutions focused on your individual firm’s needs.

Our suite of services encompasses the following;

• Mergers and acquisitions

• Bank finance/refinancing

• Succession planning

• Preparation of legal firm annual accounts

• Independent accountants report for Law Society/Regulator

• Outsourced accounting services – bookkeeping & payroll

• Finance management consultancy

• Profitability analysis

• Practice financial policies, controls and procedures

• Lock-up and working capital

• Business and personal tax

Managing your Practice Effectively

Delivering growth and profitability in the legal sector.

11


OUTLOOK FOR THE LEGAL

SECTOR

12


STEPHEN SCOTTDirector, Restructuring & Recovery

Outlook for the Legal Sector

The EconomyHeadline economic indicators for the Irish economy continue to be positive with forecast GDP growth of 4.7% for 2018 (2017: 7.2%) and projected growth of 4.2% for 2019 outlined in the latest Central Bank Quarterly Bulletin. However, as keen observers will be aware, the small print notes GDP in Ireland is “significantly affected by the globalised activities of Irish resident multi-national enterprises”. Nevertheless other measures that strip out the distorting effects of multi-nationals still report a robust current and projected performance from the domestic economy.

The labour market continues to expand, with the unemployment rate expected to average 5.4% in 2018 and 4.8% in 2019. Employment growth has averaged over 3% each year since 2012 and Ireland is now approaching technical full employment. While overall wage inflation is likely to remain contained this year and next, there is notable pressure in certain areas including the legal sector where increases well above inflation are evident particularly in the Top 20 and Dublin based legal firms.

In addition to strong consumer demand, total domestic investment continues to grow, including the important construction sector as is evident from even a cursory glance at the Dublin skyline. However, the practical implications of the cost of housing will remain a significant concern until supply catches up with demand. Inflation (as measured by CPI) remains benign at 0.6% for 2018, with a small rise to 0.9% forecast for 2019.

In spite of the positive outlook, risks abound. As the domestic economy grows towards full capacity the possibility of overheating increases, and as a small open economy, Ireland is disproportionately exposed to external risks. The international picture is characterised by volatility, consequently, most of the following risk factors must be prefaced with ‘at the time of writing’:

• Brexit – Contradictory messages continue to emerge from the Brexit talks, and even if there is progress in the short term, it is unlikely that clarity on future trading relationships will emerge for some time.

While the economic outlook domestically looks encouraging a range of international uncertainties could yet derail the Central Bank’s positive projections leading to a downward revision of growth forecasts.

13


STEPHEN SCOTTDirector, Restructuring & Recovery

• International trade tensions – The IMF recently downgraded its growth forecasts for the global economy citing ongoing trade tensions between the US and a number of its main trading partners, particularly China.

• Sterling – Movements on the € / £ exchange rate in the short term are likely to be aligned with the ebbs and flows of the Brexit negotiations. Uncertainty for Irish businesses is therefore likely to continue.

• Corporation Tax – EC president Jean-Claude Junker recently reiterated his view that elements of EU tax policy should move to

qualified majority voting, which could leave Ireland’s 12.5% Corporate Tax rate exposed. Consequently, the recent pressure Ireland has faced in relation to the EU’s Digital Sales Tax proposals could be a sign of things to come.

• Interest Rates – While there is unlikely to be any movement in Eurozone interest rates until the final quarter of 2019, following US and UK increases, the prospect of rises is now on the horizon. When interest rates come back to more normalised levels, the impact on leveraged Irish businesses and consumers will need close monitoring.

• Political Uncertainty – In addition to speculation about the tenure of the Confidence and Supply arrangement at home, there is uncertainty internationally created by Brexit and the stability of Theresa May’s government, the mid-term elections in the US, significant budgetary disagreements in Italy, Merkel announcing she will not seek re-election in Germany, Macron losing popularity in France, likely further instability in Spain, and the rise of populist parties and internal squabbles between coalition partners across Europe.

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%2014 2014

Improved ImproveRemained stable

Remain stable

Deteriorated Deteriorate

2015 20152016 20162017 20172018 2018

OUTLOOK ALL FIRMS – LAST 12 MONTHS OUTLOOK ALL FIRMS – NEXT 12 MONTHS

14


Overall, 2018 has seen a slight improvement in the business outlook for the legal sector. 64% of firms signaled the outlook had “improved” as opposed to 62% in 2017. There is a corresponding 2% decrease to 32% in “remained stable” responses, and firms with a “deteriorated” viewpoint stayed the same at only 4%.

The Top 20 firms show a similar response over the last twelve months. 67% reported an improvement for 2018 as opposed to 61% in 2017, with “remained stable” unchanged at 33% and “deteriorated” reducing from 6% last year to zero.

Looking ahead to 2019, 52% of respondents expect an improvement in outlook (an increase of 5% from

2017), which reverses a declining pattern over the last number of years. However, the biggest movement is the 10% decrease (46% in 2017 to 36% in 2018) in those expecting the environment to remain stable. Interestingly this decrease is reallocated evenly, with a 5% increase in both “improve” (47% in 2017 to 52% in 2018) and “deteriorate” responses (7% in 2017 to 12% in 2018) reflecting the considerable uncertainties in the economy.

The Top 20 firms’ views on the next twelve months follow a similar pattern to the entire sector with the “remain stable” cohort down a very significant 21% (61% in 2017 to 40% in 2018). Perhaps as a result of their more international outlook, the larger

firms are slightly more pessimistic about the next twelve months than they were last year. The “Deteriorate” responses are up by 14% (6% in 2017 to 20% in 2018) but the percentage that believe the outlook will “improve” in the next 12 months is up only 7% (33% in 2017 to 40% in 2018). However, when “improve” and “remain stable” responses are combined, 80% of the Top 20 firms have a neutral or positive outlook in spite of the international and domestic uncertainties.

Our analysis of the views of firms in Dublin and outside Dublin shows no material difference in outlook between the capital and regional firms.

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%2014 2014

Improved ImproveRemained stable

Remain stable

Deteriorated Deteriorate

2015 20152016 20162017 20172018 2018

OUTLOOK TOP 20 FIRMS – LAST 12 MONTHS OUTLOOK TOP 20 FIRMS – NEXT 12 MONTHS

15


KEY ISSUES FACING THE LEGAL SECTOR OVER THE NEXT 3 YEARS

ALL FIRMS TOP 20 ALL FIRMS DUBLIN

ALL FIRMS EX DUBLIN

Maintaining profitability 49% 60% 47% 51%

Recruitment & retention of staff 46% 80% 51% 39%

Economy 43% 33% 39% 49%

Brexit 39% 67% 47% 27%

Pressure on fees 37% 7% 36% 39%

Managing cash flow 34% 13% 32% 37%

Regulation 12% 7% 12% 12%

Adopting new technologies 11% 13% 11% 12%

Cyber risk 11% 7% 8% 16%

New forms of competition 9% 13% 9% 8%

Other 1% 0% 0% 2%

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%Maintaining profitability

Recruitment & staff

retention

Economy Brexit Pressure on fees

Managing cash flow

Regulation Adopting new

technologies

Cyber Risk

New forms of

competition

Other

KEY ISSUES FACING THE LEGAL SECTOR OVER THE NEXT 3 YEARS

All Firms Top 20

in the last 12 months

MORE THAN

of firms feel the business landscape has

improved

2 3

16


Maintaining profitability, which featured in 49% of responses, remains the key issue facing legal firms in the next 12 months. Recruitment and retention of staff is also a significant challenge with 46% of firms listing it as a key concern. The economy, Brexit, pressure on fees and managing cash flow are also included in a high percentage of responses. However, relative to these issues, firms are less concerned about regulation, new technologies, cyber-risk or new forms of competition, which are each identified as key issues by less than 15% of firms.

There are a number of material variances between the concerns of Top 20 firms and the wider legal industry. Top 20 firms are significantly more concerned about recruitment and retention of staff (Top 20 34% higher at 80%), and - with greater exposure

to international clients - Brexit (Top 20 28% higher at 67%). In contrast the larger firms see less pressure on fees than the wider market, 7% versus 37%, and managing cash flow,13% versus 34% for all firms.

The largest variation between Dublin and regional firms is on Brexit. 47% of Dublin firms see it as a key issue compared to 27% outside the capital, despite more exposure to agricultural exports to the UK. Also recruitment and retention of staff is a more acute issue for Dublin firms (51%), where competition is greater, rather than the regions (39%). Conversely, the economy is seen as more important outside Dublin, at 49% versus 39%, perhaps linked to the slower regional recovery.

Recruitment and retention of staff is also a significant challenge with

80%of Top 20 firms (46% of all firms) listing it as a

key concern.

80% of Top 20 firms and 46% of all firms

17


FIRM PERFORMANCE &

KEY ISSUES

80% of Top 20 firms and 46% of all firms

18


Firm Performance & Key Issues

FIRM OUTLOOK IN PAST 12 MONTHS

All Firms Top 20 Firms Dublin Rest Of Country

2017 2018 2017 2018 2017 2018 2017 2018

Improved 62% 57% 72% 67% 58% 55% 68% 59%

Remained Stable 37% 41% 28% 33% 42% 43% 29% 39%

Deteriorated 1% 2% 0% 0% 0% 2% 3% 2%

FIRM OUTLOOK IN NEXT 12 MONTHS

All Firms Top 20 Firms Dublin Rest Of Country2017 2018 2017 2018 2017 2018 2017 2018

Improved 55% 50% 67% 47% 57% 51% 50% 47%

Remained Stable 43% 46% 33% 47% 42% 45% 47% 49%

Deteriorated 2% 4% 0% 6% 1% 4% 3% 4%

Introduction

The Legal sector’s performance continues to reflect that of the Irish Economy as a whole. GDP growth in Ireland is buoyant at 4.7% for 2018 (2017: 7.2%) and this strong performance is predicted to continue into 2019. Our survey results show that firm’s revenues and profits have continued to increase across the majority of the sector.

Outlook

While the outlook for the sector as a whole remains positive, there has been a small increase – from 2%-4% – of firms expecting deterioration in their performance.

This negative sentiment is more prevalent among the Top 20 firms. The ‘improved’ Firm outlook across the Top 20 firms for the coming 12 months has fallen to 47% in 2018 from 67% in 2017 with 6% expecting deterioration in their performance.

DAMIAN KEALYDirector, Assurance & Business Services

19


Revenues & Profits

As trading conditions continue to improve, 69% of firms surveyed reported increases in revenues in 2018 (2017: 67%). Again, the vast majority (80%) of the Top 20 firms report growth in revenues in 2018 (2017: 78%). However, the number reporting an increase in excess of 10% has continued on a downward trend to 35% (2017: 47%, 2016: 55%).

Profits have increased in 60% of firms surveyed (2017: 62%) and in 60% of the Top 20 (2017: 50%). But again, the results indicate growth rates decreasing overall. 59% of the firms surveyed report growth of 1 - 10% in 2018 (2017: 54%). Among the Top 20 firms, 67% reported profit growth of 1 - 10% in 2018 (2017: 33%).

FIRM REVENUES IN THE PAST 12 MONTHS

All firms Top 20 Firms

2017 2018 2017 2018

Increased 67% 69% 78% 80%

Remained the same 27% 23% 17% 20%

Decreased 4% 6% 5% 0%

Don’t know 2% 2% 0% 0%

FIRM PROFITS IN THE PAST 12 MONTHS


2017 2018 2017 2018

Increased 62% 60% 50% 60%

Remained the same 27% 31% 44% 40%

Decreased 9% 6% 6% 0%

Don’t know 2% 3% 0% 0%

PERCENTAGE GROWTH IN REVENUE IN THE LAST 12 MONTHS


2017 2018 2017 2018

1-5% 18% 24% 21% 16%

6-10% 34% 38% 51% 42%

11-20% 34% 22% 21% 42%

20%+ 13% 13% 7%

No response 1% 3% 0%

PERCENTAGE GROWTH IN PROFITS IN THE LAST 12 MONTHS

All firms Top 20 Firms2017 2018 2017 2018

1-5% 24% 27% 22% 11%

6-10% 30% 32% 11% 56%

11-20% 34% 22% 33% 33%

20%+ 10% 15% 22% 0%

No response 2% 4% 12% 0%

DAMIAN KEALYDirector, Assurance & Business Services

...nearly seven in ten firms enjoying increased revenues

10%

More than

one in threereport revenue increases

of more than

20


Sources of Competition

Last year, for the first time, we asked firms where they see the main sources of competition for them over the next three years.

Increasingly organisations are hiring legal professionals to act as in house council and disrupting the role of legal service providers resulting in

54% of firms now considering ‘in-house resources’ to be their main source of competition. Niche firms are seen as a diminished threat - 50% of firms in 2018 versus 74% in 2017.

86% of the Top 20 cited UK legal firms expanding into Ireland as their main potential source of competition in 2017. This decreased to 60% of respondents in 2018. This comes in

spite of UK firms taking an increased interest in the Irish market ahead of Brexit. This year the potential for disruptive market entrants is also an increasing concern with “Competition from Online Service Providers” now perceived as a greater competitive threat for Top 20 firms at 33% (2017: 6%).

Areas of Practice Growth

As with last year, Property/Conveyancing and Litigation and Corporate/Commercial continue to be the principal practice areas driving growth in many firms. This is expected to continue into 2019. Unsurprisingly, with the introduction of GDPR on the 25th May 2018, 40% of firms reported growth in Privacy and Data Security for 2018. For Top 20 firms this is a significant area of growth compared with expectations in last years survey with 87% of these firms reporting growth in the last 12 months and significantly 73% expecting further growth in 2019.

Business Opportunities

The business opportunities identified as drivers of growth by firms over the next three years remain consistent year on year. Focusing on specialist sectors (51%) and investment in technology (51%) are still perceived as key business opportunities. Top 20 firms differ from the sector as a whole, with lateral hires (53%) continuing to be a key focus area. Their deeper pockets may give them more scope to hire in talent from rival firms. Nevertheless, specialist sectors (53%) and investment in technology (53%) are also considered key opportunities for these larger firms. While the industry as a whole are consistent year on year in relation to

Business Development & Marketing Top 20 firms are now more focused on this perhaps driven by greater competitive threats from new entrants, increased economic activity and the need to differentiate in an increasingly crowded market. Surprisingly, given that staff retention is and remains a significant issue for the sector, only 26% of firms saw investment in staff training and development as an opportunity. This is a significant decline on last year(2017: 45%). Given the sectors relatively poor view of the formal solicitor training regime this is surprising however it may be a reaction to a more competitive and mobile labour market and a focus on lateral hires to resolve skills gaps.

60%

50%

40%

30%

20%

10%

0%Investment in technology

Focus on specialist sectors

Business development and marketing

Expansion of service offering

Investment training

Lateral hires

MAIN AREAS OF OPPORTUNITY OVER THE NEXT THREE YEARS

Top 20 Firms 2017All Firms 2017 All Firms 2018 Top 20 Firms 2018

MAIN POTENTIAL SOURCES OF COMPETITION OVER THE NEXT THREE YEARS

100%

80%

60%

40%

20%

0%Client’s in-house

resourcesNiche firms Online service

providersUK firms International

firms

Top 20 Firms 2017

All Firms 2017

All Firms 2018

Top 20 Firms 2018

21


80%

70%

60%

50%

40%

30%

20%

10%

0%

120%

100%

80%

60%

40%

20%

0%

Recruitment & retention of

staff

Changed business

process(es) to be more efficient

Maintaining profitability

Increased fees

Economy

Increased sales/marketing

efforts

Pressure on fees

Engaged professional

advisors/third party support

Managing cash flow

Targeted new markets

Office space / physical

infrastructure

Discounted/reduced fees/agreed to more

fixed fees

TOP THREE KEY ISSUES FACING YOUR FIRM OVER THE NEXT TWO OR THREE YEARS

ACTIONS TAKEN BY LAW FIRMS TO IMPROVE PERFORMANCE



Key Issues for Firms

Staff recruitment and retention is still seen as the key strategic issue for all firms in 2018 at 47%. The market for talent remains and is increasingly competitive. The labour market is tight, and the new ‘green field’ offices set up by UK firms entering the Irish market is adding to that pressure. While this is an issue across the sector, this year’s survey indicates that it is the most pressing one for Top 20 firms and outweighs all

other issues at 73%. The other main challenges identified by the firms are maintaining profitability (47%), the economy (36%) and pressure on fees (28%). Brexit was only considered of significant importance by 17% of respondents. However, 33% of Top 20 firms see it as significant given their greater exposure to multinational and international clients. Interestingly, given the property moves by many of the Top firms over the last number of years, office space and infrastructure is an issue for 40% of these firms

compared with 28% a year ago indicating the rate and pace of growth in firms of scale.

Managing cash flow is perceived to be less of an issue in 2018, decreasing to 21% (2017: 37%), probably as a consequence to profitability increasing across the sector. Worryingly, our analysis of aged debtors and aged WIP would indicate there is less attention being provided to this area with overall figures for lock-up significantly increasing year on year.

Brexit

Introduced new services

Reduced operating

costs

Actions Taken by Firms to Improve Performance

The actions taken by firms over the past 12 months to improve performance are consistent with the 2017 survey. Firms in general are

focused on internal responses such as changing business processes to be more efficient (61%) and increasing charge out rates (60%). Increasing engagement with professional advisors is the only action growing in importance (49% in 2017 & 56% in

2018) as firms seek more specialist advice to address strategic issues. From an external market facing perspective, increasing sales /marketing efforts remains a key strategy (60%).

22


The Top 20 priority actions and tactics differ from that of the sector as a whole. There is a greater market facing emphasis that focuses on targeting new markets (93%), increased sales/marketing efforts (93%) and the introduction of new services (80%). While the sector as a whole is engaged in many strategies to deliver improved performance, the Top 20 firms have a clear clarity and priority relative to their smaller rivals.

Working Capital & Lock-up

Efforts to address lock up continue to fail or perhaps the eye is off this important ball. The pressures reported in our 2017 survey have continued and escalated, including rising staff costs, investment in technology and IT security. Yet lock up - a potential vital source of working capital to help address these pressures - continues to deteriorate.

Legal firms continue to try and address the lock up problem. Half have implemented an enhanced credit control function (50%), while 48% have improved training of partners and fee earners and 51% have improved the quality of information available. Four out of five Top 20 firms have changed their approach by formally linking lock-up performance to individual performance assessment.

Despite these efforts, the results from the survey show that most firms are not reporting any improvement in debtors or work in progress. The majority of firms surveyed this year report working capital at over 60 days an escalation from last year where most firms had less than 60 days. This is understandable considering the back drop of increased revenue growth however it remains a structural barrier to working capital flexibility and necessary investment for many firms.

The Top 20 also report an increase in their WIP days with 27% having an age profile of 121 + days (2017: 11%). This

is a significant change year on year and is evidence that firms are finding it increasingly difficult to convert WIP into Debtors. Firms will certainly begin to feel the negative effect of working capital difficulties if they fail to keep a firm hand on the tiller and keep up their efforts in this area.

WORKING CAPITAL DAYS TIED UP IN DEBTORS AND WORK IN PROGRESSAll Firms

Debtors Work In Progress Total

2017 2018 2017 2018 2017 2018

Up to 30 days 28% 21% 13% 11% 41% 32%

31-60 days 27% 24% 20% 11% 47% 35%

61-90 days 23% 34% 14% 24% 37% 58%

91-120 days 10% 11% 19% 11% 29% 22%

121+ days 4% 2% 24% 36% 28% 38%

Don’t know 8% 8% 10% 7% 18% 15%

Top 20 Firms

Debtors Work In Progress Total

2017 2018 2017 2018 2017 2018

Up to 30 days 0% 0% 0% 0% 0% 0%

31-60 days 11% 13% 6% 7% 17% 20%

61-90 days 61% 60% 44% 33% 105% 93%

91-120 days 22% 27% 28% 27% 50% 54%

121+ days 0% 0% 11% 27% 11% 27%

Don’t know 6% 0% 11% 6% 17% 6%

Our ViewIncreasing competition, challenges in attracting and retaining the best people and pressure to invest in technology all require significant capital investment. As in previous years there are encouraging signs that firms are trying to address this issue through investment in enhanced credit control, improved training for fee earners and, for the Top 20 firms in particular, linking lock-up to performance and remuneration.

Despite these strategies and tactics actual lockup figures are still moving in the wrong direction with more working capital tied up for longer. In practice, firms can find it hard to make significant changes to their lock-up with investments in talent and technology taking several years to translate into increased cash flow. Law firms may need to look at alternative approaches to funding. Cash flow pressure on firms may be reducing at present as top line revenue and economic growth continues but all firms need to have appropriate lock-up management policies in place to protect against any future decline or shock to the economy.

23


TALENT, TRAINING &

DEVELOPMENT

24


Talent, Training & Development

According to the latest Law Society Annual Report (2017 - 2018), there are 10,799 practicing solicitors in Ireland, up 4% from 2017, of which 20% are employed in the Top 20 firms. This increase is largely driven by Brexit and the entrance of UK firms in the Irish market.

The majority of practices are small and local: 69% of practices have one or two solicitors, with little evidence of significant consolidation or moves to create scale size, apart from the top tier of firms by size.

Nevertheless, the traditional solicitor profile has transformed, with 52% of practising certificate holders now female. At the same time, working within a legal practice is no longer the only option. In 2007, in house solicitors represented only 12% of the profession. Today 20% of practicing solicitors are in-house or public sector solicitors. According to the Law Society, 80% of these roles are based in Dublin. The working arrangements for in-house solicitors are increasingly attractive, with pay not a key criterion. This is putting increased pressure on law firms to review their working practices to attract and retain key staff.

Training & Development

With a talent squeeze and a reduced number of trainees and qualified solicitors coming through, training and education has come under the spotlight. Regulatory changes mean the Law Society will no longer be the only training route. In this new education market, trainees and firms are likely to be reviewing their options.

Firms report they are spending 2.6% of turnover this year on professional development and training. They need to ensure they receive value for this investment both in terms of the suitability of the coursework and its practical application. However, there are real concerns. Our results show a profession split on the adequacy of the current regime. When asked if the training for solicitors is currently fit for purpose, 45% of all firms responded that it was not. One in three of these firms believe that current training is not practical and does not reflect the realities of the job, while one in five believe the training is too general in nature.

Satisfaction with training among larger firms is higher, where 6 in 10 firms

ÁINE REIDYDirector, Assurance & Business Services

believe that training is fit for purpose. Satisfaction drops to 55% across all firms. This may indicate that available training is more suited to the needs of larger multi-partner practices with diverse business streams. When we look at the regional response, two in three firms outside Dublin believe that training is fit for purpose, against less than one in two of their city counterparts.

According to a report issued by the Law Society of Ireland for the Minister for Justice and Equality on the Education and Training arrangements in the state for legal practitioners in June 2018, a number of changes are proposed. The Law Society is considering the importance of skills, abilities and learning dispositions for success in its paper “Skills for 2020 and beyond”.

It is good to note that The Law Society plans to provide and develop a variety of training contracts to improve their diversity. Plans for a dedicated centre for Teaching, Development and Innovation within the Law School aims to bring together learning and development, technology, psychological services and innovation.

25


ÁINE REIDYDirector, Assurance & Business Services

Trainees

The numbers hired by firms at a graduate or newly qualified level is often seen as an indicator of a successful law firm. One third of all firms have reported increasing their trainee numbers in 2018. This is in line with our results in 2016 and 2017. Almost 40% of Dublin firms increased their trainee numbers, while 29% of firms outside of Dublin are increasing their trainee recruitment. These figures are lower than in previous years. Most Top 20 firms (80%) increased their trainee headcount with only 13% maintaining their 2017 levels and 7% reducing their trainee headcount.

Looking to the next 12 months, firms remain confident and are planning to take on graduates at the same scale with 95% (100% Top 20) of firms reporting they will take on the same or increase their number of graduate recruits. The picture for post-qualification retention of trainees’ remains consistent year on year, with one in four firms increasing retention and nearly three in four retaining the same number. 94% of Top 20 firms evenly report increasing or maintaining their qualified retention levels.

Other

Too general

Training doesn’t reflect

what job is like

Lack of practical training

0% 5% 10% 15% 20% 25% 30% 35%

IN WHAT RESPECT IS TRAINING NOT FIT FOR PURPOSE?

IS TRAINING OF SOLICITORS FIT FOR PURPOSE?

45%

55%

60%

40%

Yes - Top 20 Firms

No - All Firms

No - Top 20 Firms

Yes - All Firms

Of those who feel training is not fit for purpose.

26


Talent & Retaining Key Staff

Recruitment and retention of staff remains a key priority for the profession, with nearly one in two (four in five for Top 20 firms) respondents citing it as one of the key issues facing their firm. With 40% of solicitors aged 39 or less, people development remains a challenge for firms and for the sector as a whole. Top tier firms have confidence in how they identify and recruit talent and believe they have the right reward mechanisms to attract and retain talent. Nevertheless, for four in five of these large firms, it is a key strategic area of focus over the next three years.

Firms have identified lateral hires as a key way of addressing this issue with over 50% of Top 20 firms (25% of all firms) believing lateral hire are a key opportunity for them over the next 3 years. In addition Brexit may bring opportunities, with 15% (20% of Top 20) of firms identifying it as having a potential upside for recruitment and retention. This may be through the recruitment of returning solicitors or the addition of solicitors trained in England and Wales.

The introduction of remote working was identified by one in four of our survey respondents. This is likely to be a valuable retention and attraction tool for firms in future as the profile of solicitors’ changes.

Vacancies

There is an upward trend in vacancies reported over the last three years. 57% of firms surveyed report having vacancies in 2018 which is an increase on the 52% reported in 2017 and 40% in 2016. Over 90% of Top 20 firms report that they have current openings, consistent with 2017. It is clear that there is a gap in the ready availability of talent to fill these roles.

Against this backdrop it is notable that firms expect a marginal decrease in respect of new graduate hires in the coming 12 months. New graduates retained post qualification has remained consistent with the previous years at approximately one in four. For Top 20 Firms there is a notable increase in the number of graduates being retained post qualification, up to nearly one in two (47% compared to 44% in 2017).

Dublin firms have more vacancies than their country counterparts. This may be driven by the larger number of scale sector players in the capital, but it continues to follow the trend highlighted in the Law Society Annual report showing that 59% (6,408) of solicitors are in practice in Dublin. On this basis, the trend to geographic concentration is likely to continue.

Staff Numbers

Staff numbers continue to increase with 73% of Top 20 firms noting an increase in the year. Regional practices are also growing with 43% of firms outside of Dublin reporting increases compared to 37% last year. There is an expectation that staff numbers will continue to increase in the coming year for nearly nine in 10 of the Top 20 firms, compared to 100% expecting an increase in 2017.

70%

60%

50%

40%

30%

20%

10%

0%All firms Top 20 Dublin firms Ex Dublin

REPORTED VACANCIES

None One to four 5 - 10 10+

27


NON PARTNER PAY INCREASES

Top 20(2018)

2015 2017 2018 Dublin(2018)

Ex Dublin(2018)

2016

100%

80%

60%

40%

20%

0%

6%+ 4% - 5% 1% - 3% None Decrease

Pay & Reward

Non-partner pay increases in the sector continue to outstrip inflation by some margin and pay decreases appear firmly in the past (last reported in 2016). This is primarily driven by new recruitment and a defence against lateral hires. One in four firms will have no increase in 2018 slightly up from the 1 in 5 last year. With a continued and escalating lack of qualified people, coupled with increased caseloads driven by economic activity, the pressure remains to keep pay levels at a premium to the market. Larger firms are reporting pay increases above the market norm, with all firms reporting pay increases of 4% or more and 3 in 4 reporting pay increases in excess of 6%. Pay increase levels among all firms remain in line with 2017 with 2 in 3

firms having increases of 4% or higher and just over half of firms in the regions reporting pay increases of this level or above. It is likely that firms not matching the market may find it hard to hold onto qualified staff.

Partners are assessed across a range of measures, but some are used more frequently than others and these are changing over time. Partner performance is linked to a combination of factors primarily focused around recovery of fees (52%), new business won (43%), billed time (38%) and client retention (37%). There is a significant change this year for the Top 20 firms in the priority given to new business (50% in 2017 as against 67% in 2018) and billed time at 56% in 2017 and now 67%, which shows shifting priorities for law firms.€

73% of Top 20 firms,

(41% of all firms) have had

6%+

pay increasesin the last 12 months

28


90%

80%

70%

60%

50%

40%

30%

20%

10%

0%Merit awards Equal

share for all

partners

Increased status/

responsibility

Cross selling income

recognition scheme

Increased equity ownership

Modified lock step model

PARTNER REWARD MECHANISMS

2018 Top 20

Pure lock step

Our ViewLaw Firms and their management committees need to consider their staffing requirements carefully and give potential recruits clear and compelling reasons to join and stay. It is not purely a pay issue; it is about the working culture of the firm, having a clear path for career development and partnership, and a rewarding and fulfilling career for those whose ambitions may not lie with partnership.

Technology is essential, giving firms the tools to make the profession more accessible and attractive to a diverse workforce with different needs and priorities. The increased importance of remote working in our survey is a positive indication the profession is moving in the right direction. 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.

Firms should take time to identify people at risk of leaving and put plans in place to retain them. Open, honest and regular reviews and communication with staff and key partners is a key component of this strategy. High staff morale and a good working culture should be key ingredients.

It is notable that reward mechanisms are varied focused around merit awards, equal share and status. Larger firms focus in on merit (80%) with a greater focus on equity and lock step models compared to their smaller rivals.

Partner Performance & Reward

PRINCIPLE MEASURES OF PARTNER PERFORMANCE

80%

70%

60%

50%

40%

30%

20%

10%

0%Recovery of

feesNew business

wonBilled time/

valueClient

retentionBusiness

development activity level

Record time/value

Other please specify

Utilisation rates

Lock-up


29


IT INVESTMENT & CYBER

SECURITY

30


We’ve been tracking investment by Legal firms in IT and monitoring the key immediate issues, innovations and trends that are on the minds of Managing Partners and their senior teams for a number of years. Areas such as IT and cyber security, document management and introducing remote working are real and immediately pressing, while disruptive technologies are increasingly in focus but have yet to have impact or see significant investment.

Investment Trend

IT investment has been on an upward trend since we first looked at this area in 2014 with a notable spike in 2016. However, it is surprising to see that reported investment as a percentage of turnover in 2018 is well below trend. Only 13% of firms report that IT investment is an immediate priority in the next 12 months. Top 20 firms however continue to out-invest the rest with 33% of those firms reporting an immediate need to update and improve their technology

infrastructure, committing an average of 5.3% of turnover to IT investment versus 5% for all firms. Given the relative turnover of large and small firms, this represents a significantly higher commitment on the part of large firms. Over time, this may create a worrying gap, with small firms struggling to catch up after years of under-investment.

A Concerning Regional Trend

In a continuing trend, our survey shows a meaningful lag between firms in the regions and those in the capital. 51% of Dublin firms updated or improved their IT systems in the last 12 months or see this as an immediate priority, compared to 43% of regional firms. One in five regional firms also don’t see this type of investment as a priority. Taking the long view, a continued lag in strategic IT investment by regional firms will impact on efficiency and the ability to innovate and differentiate in an increasingly competitive market.

MARC LOWRYHead of Business Development

IT Investment & Cyber Security

5.80%

5.60%

5.40%

5.20%

5.00%

4.80%

4.60%

4.40%

4.20%2014 2015 2016

IT investment as a percentage of turnover Spend trend

2017 2018

IT INVESTMENT AS A PERCENTAGE OF TURNOVER

31


MARC LOWRYHead of Business Development

Disruptive Technology

A recent survey of UK law firms by HSBC and The Lawyer found that 54% of IT spend was for “new innovative technology” as against business-as-usual or replacement technology. New disruptive technologies fall broadly into Artificial Intelligence (AI), Blockchain and Data Analytics. Firms are also looking to technology to deliver greater efficiency and better service, along with better working practices. In addition back office systems and client collaborative tools to facilitate document management and online sharing of documents are highlighted.

AI, a technology involving machine learning and the simulation of human behaviour by computers, has applications in the legal arena through the ability to analyse unstructured data such as precedence and case law. It potentially delivers significant reductions in time-heavy research and searches. In addition, data analysis offers organisations the opportunity to drive efficiencies and gain insights through better interrogation of their data.

Neither AI nor data analysis implementation is as simple as procuring out-of-the-box solutions. Implementing these technologies requires significant commitment from the firms’ key subject matter experts to help ‘teach’ the AI and interpret the data. It is an interactive and iterative learning process. Many firms simply don’t have the resources, scale or spare capacity to invest in this technology and are adopting a wait-

and-see approach. However those firms that do succeed in implementing these technologies could garner a notable advantage, both on costs and the speed and efficiency of client service.

Blockchain is the peer to peer network technology behind cryptocurrencies. Its application is in transactions involving an exchange of value. The Block or record is secured through cryptography; each block

of all firms.

NEED TO UPDATE IT SYSTEMS

50%

45%

40%

35%

30%

25%

20%

15%

10%

5%

0%Done in last 12 months

An immediate priority

A medium term priority

A long term priority

Not a priority

2017 2018 Top 20

Improving IT systems is an immediate priority for 1/3 of Top 20 Firms

and only

13%

32


TOP IT ISSUES FACING FIRMS

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%

Cyber security Document management

Remote working

Enhancing the client

experience

Managing workflow

Creating new service

models

Use of social media

Collaboration and

communication

Use of artificial

intelligence

Big data and

analytics

On-line service

provision

Other

2017 2018 Top 15

has a time stamp and is linked to subsequent blocks through a specific “hash” code. The entire blockchain is synchronised on a distributed database to keep it secure, verifiable and traceable. In other words the records are trustworthy and tamperproof, eliminating the need for intermediaries. In March this year the first residential property transaction took place in Manchester in the UK using blockchain technology.

Additional external issues such as regulatory change, like GDPR, the introduction of new Legal Services Regulation requirements and the new regulator, also drive the need to have technology, systems and processes adequate to meet these new obligations. These are immediate requirements where investment cannot be delayed but which have real costs.

Remote Working ranks

3rdwith over one in four firms

seeing it as a key issue

A Question of Priorities

Overall our analysis indicates that the tightening labour market is focusing firms on internal efficiencies and flexible working as mechanisms for driving productivity. Firms wishing to remain competitive need to show they

can offer remote working options. At the same time, investment in client service and digital marketing is driven by the need to provide efficiencies for clients and differentiate. While cybersecurity remains top of firms’ technology priorities, document management remains the second

ranked key technology issue facing Law firms. However, only 48% of firms reported document management as a key priority this year, down 15% on last year. Remote working ranks 3rd and is increasing in importance, with over one in four firms seeing it as a key issue (up 9% on 2017).

33


UPWARD TREND IN FIRMS REPORTING CYBER ATTACK

40%

35%

30%

25%

20%

15%

10%

5%

0%2015 2016 2017 2018

Yes

Cybersecurity

Cybersecurity continues to rise in importance for Law firms with 79% of firms (73% of Top 20) reporting it as their top issue in 2018 compared to 70% of firms in our last survey. The ransom attack on a major international UK firm in June 2017 - and the resulting two-week disruption - may be top of mind for many law firms.

36% of firms said they were subject to a cyber attack in the last 12 months. For Top 20 firms, this rose to 67%. These results underline the need for continued investment and show

why firms are now taking the issue so seriously. We suspect that these results may underestimate the level of attacks.

While technology brings significant opportunities and benefits to partners, staff and clients, cyber attacks threaten to have a real economic impact on firms and should be taken seriously. Of those who reported they were subject to attack, 16% said there was a significant impact on their organisation with 30% reporting downtime as a result. Investment is needed to manage the risk.

79% of firms

Cybersecurity is the key IT

issue for

34


Our View

Be prepared: Cyber-crime is a reality of the modern world. No industry or firm is immune from attack and no system is invulnerable. While it is impossible to be 100% secure, protection against opportunistic cyber-crime is achievable without significant technical investment or cost.

• People: training the entire team to understand and spot the risks and take appropriate action is vitally important. They are a key line of defence. Everyone should be aware of the risks of social engineering and what action should be taken.

• Passwords: Have a strong password policy and implement it.

• Be ready: A breach is inevitable and with 30% of firms attacked reporting downtime as a result it is important to:

» Have data backed up, know what is there, its value and keep it secure

» Know the technical response

» Know the internal, customer, media and regulator response plan

» Have a senior response team; it’s a whole-of-firm issue, not just for the IT guy!

Management committees and partners should stay focused on the benefits of technology while being clear about the risks while ensuring they put mitigation, management processes and accountability in place.

2 3of Top 20 Firms report being subject to

Cyberattack in the last 12 months

People & Social Engineering

Law firms present an attractive target for cyber-criminals. They hold potentially valuable data about individuals and corporates concerning, for example, M&A or contracts. Law firms are also party to large financial transactions and manage significant client accounts. While systems can be built with security, firewalls and encryption, barriers to attack are only as strong as the weakest link. Many cyber-attackers use social engineering to breach systems and investment in training and awareness is vital. The

vulnerabilities identified by survey respondents are primarily people-based. The introduction of malware through inadvertent opening of a phishing email or downloading of files is commonplace.

Top 5 reported key vulnerabilities:

• Malware/Virus/Trojan

• Phishing

• People

• Password Management

• Remote Access• Passwords: Have a strong password

35


MERGERS & ACQUISITIONS

36


Significant mergers in the Irish legal sector have been few and far between over the last five years. Most of the mergers have involved smaller firms, often designed to deal with effective succession or to deliver scale in a specialist area. In contrast, for larger firms, growth has been mainly organic, supplemented by lateral hires and expansion into international markets.

As it stands, more than 90% of firms have less than five solicitors. This may be a longer-term vulnerability, leaving firms without the firepower to improve their technology base, compete on salaries and working conditions, or build specialist expertise. However, without changes in the structure of law firms, it appears that M&A activity will continue to be limited and piecemeal.

We know discussions continue to take place, but few mergers come to fruition. The structure of Irish law firms remains a significant barrier. Specifically:

• The partnership structure of law firms makes securing the commitment of all partners extremely difficult.

• There are questions over how the financial risk of cash or equity is passed on to merger partners

• Firms have unique cultures: it is hard to get all partners working effectively even prior to a merger

• Leadership teams prefer organic, controlled growth and may see lateral hires as a less risky route to achieve growth.

Our survey suggests that the primary reasons for considering a merger or acquisition remain diversification of services for clients or increasing the scale of operations. However, geographic expansion as a motivation has seen a significant increase year on year.

Mergers & Acquisitions

PRIMARY REASONS FOR MERGER OR ACQUISITION

Other

Increasing scale of operations

Developing new service delivery model

Diversification beyond legal services

Diversification of legal services

Geographic expansion

0% 20% 40% 60% 80% 100%

2018

2017

2016


37



Merger Activity & Discussions

The level of merger activity is expected to increase over the next year with 2 in 3 firms expecting more mergers. However, there is a notable gap between large and small firms, with just over half of the Top 20 firms expecting merger activity to remain unchanged, well below the 61% we reported a year ago. A similar picture was seen in our survey of UK Law Firms, which showed almost half of respondents had no plans to merge or acquire within the next 12 months.

EXPECTED LEVEL OF MERGER ACTIVITY


2017 2018 2017 2018

Increase 63% 67% 61% 47%

Remain the same 34% 29% 39% 53%

Decrease 1% 1% 0% 0%

Don’t know 2% 3% 0% 0%

The level of discussions initiated by firms with a view to a potential merger or team acquisition remained relatively unchanged between 2017 and 2018, with 29% of firms initiating discussions this year (30% in 2017). The level of discussions initiated by the Top 20 firms has decreased from 35% in 2017 to 27% in 2018.

FIRMS REPORTING THEY MADE M&A APPROACHES IN THE LAST 24 MONTHS


2017 2018 2017 2018

Yes 30% 30% 35% 27%

No 70% 70% 65% 73%

of the Top 20 firms expect merger activity to

remain unchanged

Over half

38


The number of firms who have been approached with a view to a potential merger or team acquisition has decreased slightly this year to 42% (43% 2017). In contrast, the number of Top 20 firms approached is markedly higher at 67% (56% 2017). This may be partly a phenomenon associated with Brexit - it is notable that 60% 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 team acquisition.

FIRMS REPORTING THEY HAD M&A APPROACHES IN THE LAST 24 MONTHS


2017 2018 2017 2018

Yes 43% 42% 56% 67%

No 57% 58% 44% 33%

Firms that are considering a merger or acquisition say that their primary reasons for considering such a transaction are to increase their scale of operations (79%) and to provide a more diversified range of services (39%).

HOW MANY LATERAL HIRES HAS YOUR FIRM RECRUITED IN THE PAST YEAR?

More than 10DK/Refused 6 - 10 4 - 5 1 - 3 None

100%

80%

60%

40%

20%

0%2017 20172018 2018

ALL FIRMS TOP 20

Lateral Hires

Many firms expand their business and introduce new service lines through lateral hires. Most of the Top 20 firms surveyed (73%) took on four or more lateral hires in the past year (67% in 2017) and 20% took on more than ten, a slight decrease on last year where 22% of the Top 20 took on more than ten lateral hires. More than half (54%) of the Top 20 surveyed see lateral hires as one of the biggest opportunities for their firm over the next three years. While the Top 20 are taking in larger teams, the overall pattern indicates a more modest pace of hiring - in the range of one to three.

60% of Top 20 firms have

been approached by UK firms with a view to M&A

(up from 44% in 2017)

39


Impact of Brexit

In recent years we have seen an increase in UK firms opening offices in Dublin, especially those specialising in financial services and intellectual property. Following on from Pinsent Masons and Covington Burling’s entry into the Irish Market in 2017 fellow UK law firms Simmons & Simmons and Lewis Silkin opened offices in Dublin in 2018. In addition London head -quartered international law firm DLA Piper announced that it is opening offices in Ireland in January 2019. It is noteworthy that 60% of the Top 20 firms’ surveyed (21% all 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. This belies an apparent lack of concern on the part of UK firms towards Brexit.

UK law firms that have set up, or are about to set up, greenfield offices in Dublin post-Brexit will need to recruit talented partners and teams. An increase in these lateral hires is likely to create increased competition in recruiting staff at all levels. In addition to existing domestic competition, greenfield operations being set up by UK firms will add to staff recruitment and retention concerns highlighted by 46% of all respondents as a key issue facing the legal sector over the next 3 years.

Irelands growing economy, in addition to the impact of the Brexit vote in the UK, will lead to the Irish legal market being a more attractive place to do business for UK and International Firms.

UK & International Law Firms in Ireland

UK and International Law Firms that have setup or are looking to setup an office in Ireland.

40


Our ViewWe will continue to see more UK and international firms entering the Irish market. Their route to market may be via acquisition, merger, green-field or strategic partnership with an existing Irish firm. Brexit and the introduction of LLP’s could be a game changer and a catalyst to kick start needed consolidation through M&A activity in the Irish legal marketplace.

Partners need to take time out, often with a trusted independent advisor, to review the objectives and strategy for their firm. They need to look at their growth strategy and how this can be achieved without adding to their workloads.

While mergers present many risks and obstacles they can deliver an added immediate impetus to growth. For a merger to be successful they must be properly planned, have robust due diligence and the objectives for the merged entity must be clear. Key stakeholders, people and clients, in each organisation must be given sufficient time to ensure positive engagement and an agreed strategy for the merged entity.

Lateral hires continue in the meantime to provide a shorter-term solution for the expansion and development of services and new business lines for many Firms.

Limited Liability Partnerships

Limited Liability Partnerships (LLP’s) were introduced under the new Legal Services Regulation Act 2015 (LSRA). In addition to carrying on business as a sole trade or as a partnership LSRA are contemplating three new structures, one of which is LLP’s. It is anticipated that the relevant sections of the LSRA to implement LLP’s will be executed shortly.

The contemplated structures are as follows:

1. LLP’s – a partnership of solicitors or a legal partnership in respect of which an authorisation under the act is granted.

The form of LLP is not based on the UK model but the US model and therefore existing law firms will not be required to change their legal form. General partnership law will apply subject to the provisions of chapter 3 of part 8 of the act.

2. Legal Partnership - a partnership formed under Irish law by written agreement comprising two or more legal practitioners, at least one of whom is a practicing barrister, for the purposes of providing legal services.

3. Multi-disciplinary practice - a partnership formed under Irish law by written agreement by two or more individuals, one of whom must be a legal practitioner for the purposes of providing legal and other services.

It is our view that over time the introduction of LLP’s will increase M&A activity in the legal sector as the partnership business model is an impediment to a firm’s ability to merge with or acquire other law firms. It is notable that there is more M&A activity prevalent in the UK market where the LLP model is an established business model for Law Firms.

41


BREXIT: THE UNCERTAINTY

CONTINUES

42


LAURA PRESTONAssociate Director, Corporate Finance

Brexit – Increasing Cause for Concern?

There are very few firms, if any, that will be immune to the UK’s departure from the EU. Over two-thirds of the Top 20 firms surveyed, and 39% of all respondents, believe that Brexit is one of the key issues facing the legal sector over the next three years. That said, only one third of the Top 20 firms surveyed see Brexit as among the biggest challenges to their firm over the next 3 years (17% of all respondents).

At the time of writing, the terms of the Britain’s exit from the EU remain unclear, including the impact on the Irish economy. A report published by Copenhagen Economics for the Government of Ireland predicts Irish GDP will, on a best case, see a reduction of 2.8% by 2030 should the UK leave the EU in March 2019. The 21-month transitional period agreed post-Brexit between the UK and the EU will only come into force if the UK and the EU agree a Brexit deal. There is an increasing cause for concern that a no deal Brexit is possible. If no deal or extension to negotiations is agreed, the UK will leave the EU at midnight.

Whether there is a two-year transition period (or longer) or not, it is

apparent that, post Brexit, Ireland will have lost an important ally at the negotiating table, particularly on the issue of greater tax harmonisation.

Insights from Our Survey

Respondents felt that the areas of recruitment and retention of staff (24% of all respondents) and competition from UK law firms (37% of all respondents) ranked among the highest Brexit-related threats to their firms.

Many of the larger UK law firms have entered or increased their footprint in the Irish market since June 2016. According to the Law Society of Ireland annual Report 2017/2018 approximately 10% of the total 18,000-strong Roll of Solicitors is made up of solicitors from England and Wales. It is clear that, as Brexit looms, an increasing number of legal professionals are considering Ireland as a possible alternative to the UK.

There is evidence that UK law firms setting up greenfield offices in Dublin seek to recruit talented partners and teams within the market. This is set to

increase competition at all levels and drive salary inflation.

Brexit – Opportunity or Threat?

Our survey found that 55% of all respondents are more concerned about the impact of Brexit than 12 months ago, with only 2% saying their concerns have decreased. However, firms remain divided (one third each) on whether Brexit is an opportunity or a threat to their firm or will have no impact.

Their views may be coloured by their client base, or the firm’s mix of domestic and international clients. Clients are likely to need advice in relation to commercial cross border transactions and reviews of existing and new contractual arrangements involving supply chains and customers in the UK.

Ultimately, the profession is reliant on an active domestic economy. Any economic crisis precipitated as a result of Brexit will have knock on consequences for the profession. Our insight into the increasing levels of

43


LAURA PRESTONAssociate Director, Corporate Finance

lock up and cash flow is interesting given the potential risks around Brexit.

Revenue & Profitability

Close to a third of all respondents believe that Brexit will have no impact on their firms’ revenue and profitability. In stark contrast, only 7% of the Top 20 held the view that Brexit will have no impact on their firm’s revenue and profitability - 60% of them believe it actually poses a threat as these firms are more exposed to

the international market place.

When asked what opportunities Brexit will have for their firm, respondents

saw a potential expansion to their client base (31% for all firms & 67% of Top 20), the ability to extend specialist services (28% for all firms & 47% for Top 20) and higher levels of business in the short (26%) and long term (30%). Increasing potential foreign direct investment, resulting from transfers of business or business units to Ireland and UK businesses looking for an EU base, may prove fruitful avenues for business development and growth.

Existing & New Business

Overall, 59% of respondent firms were of the view that Brexit will have no

impact on their existing client base, down from over two thirds in 2017 (67%) with one third (34%) of the Top 20 firms surveyed holding this view. There is heightened concern about levels of new business in the longer term with 47% of the Top 20 firms (21% all respondents) believing that Brexit will have a negative effect on existing and new business in the longer term.

Firms in different geographical areas and those exposed to different sectors will see clients impacted in different ways and to a different extent. The Top 20 have a distinctly different take on which areas for them will be affected and most by Brexit.

Opportunity No ImpactThreat

30%

34%

38%

32%

32%

33%

60%60%

7%

7% 33%

33%

IMPACT OF BREXIT ON REVENUE & PROFITABILITY

REVENUE (inner circles)

PROFITABILITY (outer circles)

All firms

Top 20 firms

THE TOP FIVE AREAS OF BUSINESS EXPECTED TO BE IMPACTED MOST BY BREXIT:

All firms Top 20 Dublin Rest

2017 2018 2017 2018 2018 2018

Property, construction and conveyancing 49% 52% 61% 47% 46% 61%

Corporate & commercial 37% 38% 44% 60% 46% 27%

Regulatory/financial services and banking 28% 32% 72% 67% 42% 16%

Mergers & acquisitions 27% 26% 56% 60% 32% 16%

Litigation and dispute resolution 28% 25% 22% 25% 26% 24%

For firms in the regions there is a greater emphasis on property and construction as a key impact area with nearly two in three firms seeing this as the key concern, while other sectors are seen as less significant.

44


Over two thirds (67%) of the Top 20 firms see regulatory, financial services and banking as the area that will be impacted most by Brexit (compared to just a third (32%) of all respondents). Close to two thirds (60%) of the Top 20 firms said they are concerned about the impact of Brexit in the areas of corporate and commercial, and mergers and acquisitions, compared to a quarter and one third of all respondents.

Across all firms, the area of property, construction and conveyancing was seen by all respondents as the practice area most likely to be

affected by Brexit (52%), but was only ranked fourth among Top 20 firms.

The disparity between the results cited by all firms and the Top 20 firms is unsurprising, given the higher exposure of the Top 20 firms to UK based clients and clients operating in the UK.

Preparing for Brexit

Our survey results show over half of the Top 20 firms (53%) have prepared a Brexit strategy with three in four firms having already executed their plan. However, across all firms, only

21% have prepared a Brexit plan. Inertia is understandable. Given the uncertainties, any investment in time and resources in Brexit planning is difficult to direct. We have always maintained that contingency planning is vital and that planning for the worst scenario will cover the bases. Services businesses - and the legal sector in particular - is a key component to the economy. Focus by industry players is vital against this backdrop, as is policy and support.

In contrast, our recent Law Survey of the UK market found that only 28% of firms surveyed in the UK (excluding Scotland) had a Brexit-specific strategic plan in place. This may be a result of the remaining level of uncertainty, or simply the cushion provided by a growing economy and growing revenues. Although the future for Brexit remains far from clear, it is apparent that many UK firms that have already adopted and implemented a Brexit strategy have either established a presence in Ireland via acquisition, merger or green-field office or have attempted to align themselves with an existing Irish firm.

50%

40%

30%

20%

10%

0%

50%

40%

30%

20%

10%

0%All firms All firmsTop 20 Top 20

SHORT TERM IMPACT OF BREXIT ON EXISTING & NEW BUSINESS

Negative No Impact Positive

LONG TERM IMPACT OF BREXIT ON EXISTING & NEW BUSINESS

Top 20 firms see Brexit as an opportunity to EXPAND their

client base (as opposed to one in three of ALL firms)

2 in 3

45


The views on Brexit have shifted notably over the past year. Whereas in previous years there was tangible concern over the UK’s decision to leave the EU, firms that had previously seen Brexit as a threat are now not so certain. This year’s UK survey showed the same percentage of firms see Brexit as an opportunity as see it as a concern. This might have been understandable had the negotiating parties made notable progress towards an agreement, but in the summer when the research was undertaken and at the time of writing, there was clear evidence of significant negotiating challenges ahead.

Why are firms apparently dismissing such a significant change to the UK?

For the past 18 years our UK legal market survey has asked firms, “Looking at the year ahead, how confident are you about the business outlook for your firm?” Back in the middle of the Global Financial Crisis in 2008 only around half of UK law firms were confident about the year ahead. In contrast, this year we received the

highest ever positive response with 100% of respondents (over 130 firms) saying they were confident about the next 12 months

Given the uncertainties ahead, why so much confidence? The UK legal market has been buoyant for the last few years with average growth rates for the top 50 firms reaching high single digits. This growth story might have emboldened firms, but it has been matched by a small but consistent decline in margins year on year.

At the same time, UK legal firms remain thinly capitalised, which leaves them with little cash retained in the business to deal with unexpected surprises. Brexit will cause disruption for the clients of law firms and these clients may need advice, which should lead to increases in revenues.

Respondents to the UK survey said competitive pressure has either slightly increased over the last 12 months (51% or respondents) or significantly increased (23% of respondents). However, by some margin the biggest challenge identified by firms over the next 2-3

years is “attracting and retaining talent”, with “pressure on fees” and “differentiating my firm from competitors” also priorities.

“Adopting new technologies” is also a challenge. However, firms are focused on incremental improvements, such as “enhancing the client experience”, “managing workflow” and unsurprisingly “cyber security”. Major transformational investments in areas such as “big data”, “data analytics” and “artificial intelligence” were low down the list of investment priorities.

While for the majority of firms their local market in the UK and servicing international clients from a UK base is the chosen strategy a small but significant cohort of firms are looking at internationalising. While Brexit has provided a catalyst to speed up this process, geographic expansion is seen as a route to growth and scale. Even prior to the vagaries of Brexit Ireland in itself has been an important market given its strong-performing economy, employment market and strong foreign inward investment by international business looking to establish a foothold in the EU. Importantly it is a common law

Brexit from a UK Perspective

GILES MURPHYHead of Professional Practices, Head of Business Interests, Assurance & Business Services

46


Our ViewThe future for the UK relationship with the EU remains far from clear. This level of uncertainty is a real cause for concern among Irish law firms. While there is a 21-month transitional period agreed post-Brexit between the UK and the EU to 31 December 2020, this is not a certainty and will only come into force if the UK and the EU agree a Brexit deal. As such, there is an immediate need for law firms to carry out a Brexit impact assessment on their services, their client base and retaining key talent to ensure that they are not vulnerable to losing market share, hemorrhaging key clients or losing key talent and teams through lateral hires.

Law firms are ambivalent as to whether to treat Brexit as an opportunity or a threat with many unknowns, it is important that every firm seeks to implement a Brexit strategy that should act as business roadmap for the firm. Those firms likely to benefit most from Brexit will be those who have a contingency plan in place and have implemented a Brexit strategy, while remaining focused on their clients, core services and efficient practice management. A firm’s Brexit strategy should include mitigation plans for each Brexit risk specific to the firm, including market dynamics, currency, governance, regulations & standards, people and competition.

jurisdiction with mutual recognition of solicitor’s qualifications. UK firms had already established a foothold however this interest has mushroomed over the last 24 months. For UK firms wishing to internationalise and perhaps mitigate some aspects of Brexit it seems an obvious first choice.

The UK legal market remains a vast opportunity with English Law still considered a benchmark for international agreements. For the

focused, flexible, well-run firm with a plan for its future development, the future is likely to be as positive as they believe. However, for those firms that are poorly funded, lack any clear direction or differentiation, the future might be more challenging no matter how confident they are. For a number of firms, a small shock could be enough to dent their future financial viability. Confidence in the face of Brexit may prove misplaced.

47


Dublin Professional Practices Team

Laura Prestont. +353 (0)1 495 9529

e. [email protected]

Marc Lowryt.+353 (0)1 495 9200


Liam Dowdallt. +353 (0)1 495 9526


Stephen Scottt. +353 (0)1 495 9568


Gordon Haydent. +353 (0)1 495 9281


Áine Reidyt. +353 (0)1 495 9237


Derek Ryant. +353 (0)1 500 6527


Giles Murphyt. +44 (0) 20 7131 4369


Damien Kealyt. +353 (0)1 495 9260


Con Caseyt. +353 (0)1 495 9245


Cedric Cruess Callaghant. +353 (0)1 500 6523


Padraig Connort. +353 (0)1 495 9549


Frank Brennant. +353 (0)1 500 6528


Paul Wyset. +353 (0)1 495 9553


Liz Cahillt. +353 (0)1 495 9525


48


Smith & Williamson is a member of Nexia International, a worldwide network of independent accounting and consulting firms.

smithandwilliamson.com/en-ie

Smith & Williamson Freaney Limited Authorised to carry on investment business by the Institute of Chartered Accountants in Ireland. A member of Nexia International.

Paramount Court, Corrig Road, Sandyford Business Park, Dublin 18, D18 R9C7, Ireland t. +353 1 495 9200 f. +353 1 495 920112 Herbert Street, Dublin 2, D02 X240, Ireland t. +353 1 500 6500 f. +353 1 500 6501

Log number: 150318lw Expiry date: 31/10/2019

Documents

Annual Survey of Irish Law Firms 2018/2019€¦ · Last year many law firms were concerned that levels of growth would not be sustained in 2018. Nearly half of the firms surveyed