The legal industry has demonstrated impressive financial performance in 2024, but challenges around productivity, growth and resilience remain. According to PwC’s latest Law Firms Survey, firms are seeing strong fee income growth and rising profitability, with 81% of the UK’s top 100 firms reporting profit increases. However, the industry also faces critical challenges that demand adaptive strategies and strategic risk management.
Financial performance across the UK legal sector has been ‘overwhelmingly positive’, with fee income growth exceeding expectations – by more than 10% in over half of the top 50 firms – despite global market volatility and inflation running at about 5%. Larger firms have managed to control costs effectively, bolstering their profitability.
However, cash performance remains an area of concern, as many firms struggle with poor working capital practices and UK average lock up days remain ‘stubbornly high’. PwC notes that strong performance this year may have alleviated some pressure but has also potentially ‘hidden operational working capital shortcomings’ that need to be addressed.
In spite of increases in profit, firms are expressing caution, with 55% of the top 100 ‘extremely’ or ‘somewhat’ concerned about macroeconomic trends and geopolitical instability moving into 2025.
A significant shift this year is the continued rise in adoption of generative AI (GenAI). While 33% of firms believe GenAI could help reduce chargeable hours by at least 16%, the technology introduces both opportunities and risks. The top ten firms are overwhelmingly (83%) sure that AI systems will have a positive impact on revenue and margins, but mid-tier firms are more cautious, expressing concern that AI adoption could lead clients to expect lower fees or even reduce the demand for traditional legal services.
More than half (52%) of the top 100 firms are concerned that the pace of digital change will prevent them meeting goals, given the levels of investment potentially needed to compete in this arena and existing infrastructure – though this has fallen from last year’s 63%, as the industry has become more comfortable with large language models and implemented programmes of digital change.
The challenge now for law firms is to strike a balance between leveraging GenAI for productivity gains and addressing concerns about pricing pressures. Firms must also prepare for a potential reshaping of their workforce, investing in upskilling and new digital roles, as AI redefines responsibilities and skill requirements.
The survey reveals that cybersecurity remains a top concern, with 90% of firms expressing worry over cyber threats. This heightened focus is reflected in increased cybersecurity spending among larger firms, as law firms seek to protect sensitive client data.
The growing sophistication of cyber threats, alongside the industry’s heavy reliance on digital systems, makes robust security measures essential to safeguarding reputational and operational integrity.
In this complex environment, the industry is rethinking its growth strategies. Many firms are pursuing innovative legal solutions and focusing on hiring rainmakers to drive growth, while lateral hires remain a popular strategy for expansion. For the top 50 firms, ‘commercial training for partners and fee-earners’ is the top priority, as they look to expand and improve their service offering. For teams facing rising wage inflation and staff turnover, attracting and retaining talent will be crucial.
Business support is a focal area for improvement in the survey and in-house legal teams with expertise in cybersecurity, AI implementation, risk and digital transformation are likely to be in high demand, as firms work to strengthen their capabilities and meet evolving client needs. Marketing and Business Development is also viewed as one of the top six priorities for 2024, speaking to a focus on driving organic growth strategies.
As the legal industry adapts to rapid changes and tackles its widening spectrum of priorities, firms that can balance quick and thoughtful innovation with robust risk management will be well-positioned to thrive. Speak to us about your team growth and transformation plans for further insights into industry trends and best practices.
