Watch the recording: Law Firms’ Survey 2023 webinar

Transcript

Kate Wolstenholme:

So, perhaps if we can just move the slides on and have a look at the sessions for today, we're going to have four sessions. So, first of all, Leon will be talking us through financial performance. We're then going to have a session on people, moving on to Dan on working capital and financing, and finally Greg on strategy and transformation. I'll let them all introduce themselves a little bit more as we get into the body of the chat. So, then without further ado, Leon, I'll hand over to you to take us through the financial performance section of the survey. Thanks.

Leon Hutchinson:

Thank you very much, Kate. So, just to introduce myself, my name's Leon Hutchinson. I'm an audit director, which means that in my day job, all my clients are law firms with the delivery of statutory audits, I also deliver SRA account services. But very much I am heavily invested in PwC's law firm survey. I've been involved in it for a number of years and I'm now a co-editor and project manager of the survey itself. But let's now get into the detail of our survey. And just before we get into looking at the data for this year, I did just want to set the context, looking back over what's happened over the last two years. And the last few years have been very good for law firms. You look at fees, they're up. You look at profits, up, profit margins, up. It's all been very positive and coming into the current year, which is just as a reminder is the year that runs from 1st of May 22 to April 23, generally, coming into that year firms were very optimistic. There were a few shakes in the economy at that time, but still optimistic about what the financial year was going to hold. But then lots of things, of course, happened in that financial year, as we all well know. Inflation increased, it hit a peak of around 11% in October 2022. It has fallen down slightly, but still not come back down to those low levels that we were all used to for a number of years. That forced interest rate rises. So, right at the start of the year in May 22, interest rates were running at about 0.75% but come the end of the year in April 23, it was 4.25%. And it's now even grown up to 5.25% where it's currently at. And that's stayed for a little while.

And driving that and other factors brought a cost of living crisis. And when we put all of those things in a pot, it very much contributed to a shift in market conditions, reduced deals activity and all of this really had an impact on the financial performance of law firms. And again, before we get into the data, I'll just introduce the highlights and then we can, sort of, underscore that with some of the information and data we get from our survey. But the highlights for financial performance is really suggesting income growth has been achieved across the sector but generally, that's just sitting below inflation, for a number of firms just slightly below, but it is below inflation. The flip side of that is we see costs increasing at a rate ahead of inflation and ahead of the fee income growth. So, you think of staff costs, I think that's increasing in real terms around 12% to 14% across our bandings, which are top ten, 11 to 25, 26 to 50, 51 to 100. But other costs as well, you probably hear me mention IT and marketing as I go through some of the data. Those are the examples of costs that are also increasing at rates ahead of inflation. And that puts pressure on margin. And we will see our average in margins have come down across the bandings. That said, the predictions of firms that are looking forward, there is still optimism there, at least across a number of firms and again, we'll come on to that. So, what I wanted to start with in terms of the data and information we have is global financial performance. So, just to be very clear, a global firm in our survey is a UK headquartered law firm that has more than 20% of its fee income from non UK locations.

So, that's what we defined as a global firm. And we focus on the top ten and the 11 to 25 firms in that respect. So, how do these firms fare when it comes to global fee income? Well, the top ten firms on average increased their fee income by 8%. So, reasonably good. Top 11 to 25 by 12%. Now, this is on the back of flat or reducing chargeable hours per head. So, when you look at how the top ten achieved this increase, it was actually through the rate per hour that they're achieving. But when you look at the 11 to 25, there's probably two reasons that are going into that. The rate per hour is going up, but also there's been some expansion in some of those international markets, larger teams, and that has led to that fee income increase. But the flip side of that is staff cost. So, you can see on here the staff cost line for fee earners, the staff cost line for non fee earners. So, focusing on the top ten first. If you look at those both together, you'll see that the staff cost ratio overall has gone up by 2.7 percentage points. So, quite a big leap. Now, the 11 to 25, you'll look at it and think, well, have they gone down? Because actually you can see the fee earning cost ratio is going down. So, you might think, well, that's good. They've achieved something excellent there. But just to put a dampener on that in some degree, there are some outliers in that 11 to 25 information. And when you look at the actual movements like for like, actually the staff cost ratio has actually increased by 1.7 percentage points. But then just drawing back on the top ten, just to use that as an example.

So, we said it's gone up by 2.7 percentage points. If you put that increase in real terms, in real cash, what is that? It actually amounted to £36 million. So, that represents the amount of additional staff costs over and above what you were able to capture in the fee income rate increases for top ten firms. So, £36 million is that over and above increase in staff costs this year. And then certain other costs are also increasing ahead of inflation and the ones that stand out are IT and marketing. And you can see the increases in the ratios there for the top ten and 11 to 25. Those are increasing ahead of inflation. And so what does that do to the profit margin as we come down to the bottom? I'm just going to focus on the profit before peak share equity remuneration for the global firms. And when we look at that, we can see the top ten, it's fallen from 40.4% down to 38.2%. For the top 11 to 25, again, it looks like an increase that actually deserves outliers similar to the ones in the staff cost that when we just remove those, we look at it on like for like, actually the profit margin for the 11 to 25 would indicate there is a fall of about 2.5 percentage points. So, there is just that caveat with some of that data in the 11 to 25 because of some outliers. So, as we move to our next slide, we're just focusing on how the firms-, where that growth is coming from. Is it coming from the UK offices? Is it coming from international offices? And here we have the example of the top ten. And we can see for revenue that the increase is coming pretty much evenly from international and UK, a little bit more from international, but it's pretty much split evenly.

And I'm looking at this before the impact of foreign currency exchange rates, which you can see does have an impact on the growth of revenue as well to take into account. Now, the profit side for the top ten, you can see actually there's a big impact from international and the fall in international profit this year. So, about almost £10 million. That is more than offset by the growth in UK profit, but that is definitely having an impact on the overall increase in global profitability. The top ten firms again, just ignoring that forex, there was a positive impact for top ten firms from the forex of £3.6 million that you can see on the screen. Looking at the same thing for top 11 to 25, it's very similar for revenue. The mix is about 50, 50 give or take, a little bit more on the UK this time instead of international for the top 11 to 25. And then when you move to profit, you can see again, predominantly the profit is coming from the UK offices, but the international offices at the top 11 to 25 firms have increased profit as opposed to what happened in the top ten firms. And again, you can see smaller impact from forex on the top 11 to 25 as compared to the top ten. So, those are the key data points that we wanted to draw out on global financial performance. Let's now move into UK financial performance. I will come to staff costs that I've just brought up in just a second, but just again to quote what the-, what the movements were on fee income. So, across the bandings, the increases were between 8% and 10%. So, relatively good, but obviously we're reminded of that inflation rate that was about an average of 10% across the year.

So, it's just comparing to that. So, that's the caveat there, but also a good comparison with the fee income is what were the predictions of firms last year. So, actually for the top ten, 11 to 25 and the 51 to 100, they all exceeded their expectations in terms of their fee income increases. That's a real positive. And now for the top 26 to 50, they looked really aggressive last year. They were way ahead of anyone else in terms of their predictive fee income growth. And the fee income growth was 11% that they were predicted. They actually came out about 8.5%. So, the top 26 to 50 didn't hit the predictions that they were hoping for. So, again, we come to staff costs. It's a similar story as what we talked about on global. Obviously we've got a little bit more detail here. There are a few things just to draw out but firstly, as we look at those staff costs, we can see that the top ten and the top 26 to 50 are up about 2 percentage points. Top 11 to 25 up about 1.3 percentage points, top 51 to 100 up 1.6 percentage points. So, the staff cost ratio increasing and obviously increasing staff costs in real terms increasing rather than the fee income is increasing. But the key point here is that with the exception of the top ten, the staff cost ratio for all of the bandings, 11 to 25, 26 to 50, 51 to 100, they're all at record levels. You can see it's all ahead of the last six years but actually you could go back further and you will see that all those bandings, the staff cost ratio at record levels. And then we bring up here, obviously the percentage property loss account, like we saw at the global level and again, we see other costs increasing as well.

And in real terms, it's the same as it was with global. IT and marketing seem to be the real big ones that are driving cost increases. And perhaps with IT that comes out of a need for investment in various areas. One of the pieces of data in our survey was the increase in cybersecurity spend. So, across the bandings that went up between 15% and 67%. So, things like that are really driving that increase in IT costs. And for marketing, perhaps that's just a return to those pre COVID levels of spend in respect of marketing and why that is increasing. And then we can come down to the net profit margin but actually I want to use the next slide to present that because that shows us a trend of profit margins over the last six years. But focusing on what's happened from 22 to 23, we can see that across all the bandings there has been a deterioration in the net profit margin. The top ten have managed to limit that. They've limited it to just a 0.3%, 0.4% to 38.9%. But it is bigger in the other bandings. So, the top 11 to 25 down 1.4 percentage points to 27.9%. Top 26 to 50 down 1.8 percentage points to 25.2%. And the top 51 to 100 again may be limited somewhat, but down 0.6 percentage points to 23.7%. And just before I leave this point on profitability, I thought one of the starkest stats that stood out to me in this year's survey was the fact that 44% of the top 100 firms reported falling profits. And I've been involved in the survey for a number of years, and that percentage is probably the highest that I can remember it. 44% of the top 100 reporting falling profits. So, what do firms think about the future? What does the future hold in terms of financial performance?

So, again, we bring up on the screen the predicted change movements in fee income and movements in profit for FY24 and FY25. And you can see from that there is still some optimism. There is expectations of growth. So, you can see for FY24 fee income increases of between 8% and 11% across the bandings. Not as strong in FY25 between 5% and 9%, but still the expectation of growth is there. But the key point is here that actually, with the exception of a couple of things, actually in the main, the profit increase is generally lagging behind the fee income increase. You can see the exceptions to that is the top ten, where in FY24 they're expecting near 10% growth in profit as opposed to 9% growth in fee income. And also the 51 to 100 in FY25 where they're looking at 10.5% increasing profit as opposed to 9% growth in fee income. But all of the bandings in those other years across the patch, I would say the majority of law firms are recognising that profitability is still going to be under pressure, profit margins are going to be under pressure and that is going to last for at least the next-, the next two years. Now, what I don't have a slide on is profit per equity partner, but I know everyone might be interested in that. So, I have got some data points on that. So, the top ten and the top 51 to 100 were the two bandings that managed to increase profit per equity partner or PEP. Top ten increased it by just 1% up to about £1.4 million. Top 51 to 100 increased it by around 3% to around £500,000. In contrast, the top 11, 25 PEP fell by about 7% to £800,000 and top 26 to 50 fell by 11% down to £600,000.

Now, obviously you have to remember it's not just the profit number that's impacting the PEP, the PEP KPI, but also the movement in full equity partners will impact on those stats as well, but that's just so you've got that data there. So, as we stand back and after just considering those highlights of financial performance for law firms this year, what do we see as the key challenges based on what we looked at? Well, pricing definitely looks to be one of them. Pricing is going to be difficult, and linked with that was the fact that 71% of top 100 firms are extremely or somewhat concerned regarding their inability to recover cost inflation in pricing over the next couple of years. No doubt clients of law firms will be demanding to keep costs low, they'll be looking at their own cost base. So, no doubt partners of law firms and those that are taking the lead in negotiating fees and costs with their clients will need some support in delivering pricing because it will be difficult. And then we expect firms to look at costs. Will there be elements of cost control? Looking at both staff, but also other costs as well. We're now well out of COVID and firms may do well to stand back and go, 'Well, what should our cost base look like in the world we're living in today?' And we expect a number of firms to do that. And when you look at those things, we would expect that if you can get those things right in terms of pricing and your cost base, it should have a positive impact on the net profit margin.

But we appreciate that there's more than just focusing on pricing and costs to do to get the margin right and to improve the financial performance and so many firms may look at themselves and say, 'Well, what does the future hold? What might my firm look like, say, in five years time?' And one of the key things that we brought into our survey this year is the need for transformation. And with the speakers that they follow, they will touch on those aspects of transformation in people, IT, working capital but that point around transformation is why we titled this year's survey, and you'll have seen it on the opening slide actually, as bold steps to sustainable transformation. And I think as we-, as we say that, we can very much nicely move into our next section, which is the people section.

Rand Coulthard:

Brilliant. Thank you. Hopefully you can hear me okay. Okay. Brilliant. Had a few issues technology wise, so just checking. So, I'm Rand Coulthard and I'm a director in our workforce practice and I spend a lot of my time in the legal sector. So, I just want to touch on some of the themes that we're seeing for people. So, despite the turbulent economic client climate that Leon's talking about the challenging market conditions, particularly for certain practice areas, we're seeing that law firms have continued to grow headcount over the past years across both fee earner and business service populations. I can see a question in the-, in the comments around the IT operating costs and whether they're going up because we're digitalising, whether it's related to inflation. I think causality is very hard to determine, but we are seeing quite a lot of trends towards digitalising, particularly in business services populations. And of course, what that sometimes does is, in the short term, lift headcount for a longer term reduction. So, that might be feeding into some of the themes there. On the face of it, the movements indicate that the sector is weathering what is quite a volatile operating environment well. However, the chargeable hours as Leon mentioned are broadly flat across the fee earner grades. And there's been a real marked fall in chargeable hours, particularly across the partner population that we're seeing. So, you see some of those statistics there. With those small increases in headcount and flat or falling chargeable hours, we do see spare capacity increasing for all bandings outside the top ten.

And this is at a time where firms are focusing on improving their utilisation levels. So, obviously it's contradictory to that. Firms are going to be mindful of the size and shape of their workforce as they prepare potentially for that significant transformation both over the short term and then thinking particularly with the longer term around the impact of AI. So, kind of, coming back to that operating model question. I think what we are seeing is a bit of a trend in operating models towards essentialising some services to try and get some more of those scales of economies, particularly for the bigger law firms but obviously that can sometimes be tricky, especially with the cultural and transformation aspects that Leon touched on there around those models and being quite high touch. (TC 00:20:00) So, moving from something that's very high touch to something that is less so, while has an efficiency benefit can be difficult from a cultural transformation perspective. So, strategic workforce planning going forward then is going to be a very critical activity for firms in the coming years as they embrace those rapidly changing operating context but also that that point around utilisation, so getting a much more agile, real time approach to strategic workforce planning, particularly where it can be digitally enabled can help with that. Another area to really focus on is evaluating skills gaps in areas. So, that's everything from change, leadership, technology and then identifying the talent pools to source those skills that will enable the firms to actually respond with the agility and sector changes.

And I think that there's a bit of a challenge in finding those skills at that, kind of, technically capable level that you would need them, but also with an understanding of the legal sector and how law firms work because those sorts of operational changes are different-, are different for the legal sector. So, following on them from significantly increased levels of staff turnover last year, due to the great resignation. I think we talked a lot about the war on talent and I think the answer is talent has won. What we're seeing is a bit of a general softening of labour markets and we expect that to flow through to the legal sector over the course of of 23 and 24. In the current environment, we do also expect law firms to adopt less aggressive hiring tactics as they assess the impacts of that reduced market demand on particular practice areas, as well as thinking about some of the longer term impacts of their post COVID working models and as Leon says, right sizing those for the workforce for today, and then the potential for GenAI then to think of a rethink on the size and shape of workforce. So, where particularly can you use that to almost-, to reduce large swathes of work potentially or do them in very different ways. And then finally, to touch on the last slide, so female representation at full equity partner level has trended upwards across all of the bandings. The top 26 to 50 and 51 to 00 firms have made the largest stride in this-, strides in this last year reporting increases of 2.3 and 1.3 percentage points respectively. So, 23.9% and 28.6%, which is-, which is a good trend to see.

While these figures are encouraging some of the firms will need to push harder to make sure that we increase the pace of change and meet diversity and representation targets within the published timelines. Gender is one consideration, but of course there are-, there are more and as we talk about the context of the operating environment, and we talk about the shifting needs of the workforce and capability we are looking to ever increasing diversity of pools, talent pools to source from that might not always have been traditionally passed the pipeline. So, that takes us through on the people section. So, I think handing over to Dan.

Dan Wicks:

Thank you very much Rand. And so just to introduce myself briefly, I'm Dan Wicks. I'm a director specialising in working capital improvement at PwC. I've got 15 years experience helping clients in various sectors to unlock cash from operations, and I also lead our work with law firms on lock-up management. And I've worked with many firms over the years across process improvement initiatives, technology and managed services around this topic. We can just hop onto the first slide. We'll get into some of our findings from this year's survey as regards to working capital and financing, and the first slide here is a-, is a commentary on the top priorities for business support over the next twelve months, as reported by the contributors to the survey and for a number of years, certainly the five or so years I've been contributing to the survey, improving working capital performance has barely featured quite frankly, as a-, as a business support priority. However, this year we've seen it shoot very much to the top of the agenda. And whilst firms, certainly the ones I've worked with over the years, have long been aware of the opportunity on offer from lock-up improvement. The accelerated partner tax payments that are coming this year due to HMRC's basis period reform and of course, the wider economic backdrop that Leon was talking to at the start, high inflation, high interest rates, are really bringing working capital performance into much sharper focus for firms across the sector. The majority of firms did cite working capital improvement, as you can see in the visual on screen as one of their top priorities for business support and over half of the top ten said the same.

The next two most common inclusions in that top three were standardising and centralising processes, and improving the use of data and analytics. I'm sure it's no coincidence that both of those things are actually very relevant to the pursuit of improving working capital performance amongst other things. When we look at this year's performance reported by firms, it's easy to see why firms are placing a higher degree of priority on this in the face of multiple cash headwinds. We saw that the year end lock-up levels did remain stubbornly high across all bandings. We can see in black on this chart, ranging between 119 and 132 days at the year end. The top 25 made modest improvements at year end, but the rest did see deterioration at that point. We know a big push often goes on into achieving these year end numbers and while that does show positively what can be done with the right level of focus at the year end, firms are not sustaining this performance throughout the year. In fact, the gap between year end numbers and the average performance throughout the year has actually widened this year. And clearly it is that average performance throughout the year that really matters from a cash flow and liquidity perspective. We can see here that those numbers are much higher, ranging from 140 to 152 days for the top ten, which increased by 17% this year. If we just step on to have a look at that in the form of a trend, I think we can see, quite clearly, that, unfortunately, we have a worsening picture as far as average lock up performance is concerned, and it's deteriorated for all bandings, bar the top 51-100, and this is pretty much continuing a trend we've seen now for three years straight. Underneath that total average lock up number, all bandings did actually manage to improve billing performance, with a reduction in average WIP days, but where firms really do seem to be struggling is with debtor days, both for UK and international offices. Firms saw a significant deterioration in average debtor days, especially in the top 11 to 25 that saw an eleven day increase, to 87 debtor days. What this could be partly down to is the clients of law firms are much more closely managing their own working capital performance, which is exerting a lot of pressure on law firm contracting, billing, and collections processes, and the behaviours of the wider firm around those privacies, and if these are not invested in and bolstered, then chances are, with those additional head-winds coming into play, performance with deteriorate further in the coming year. If we can just pop to the next slide. Thank you.

So, obviously, on the horizon this year is the additional cash pressure that the basis period reform will confer on firms, and so, as a result of all this, firms are clearly acutely aware that there's a significant opportunity on offer when it comes to improving lock up performance. Despite the deterioration in performance that we've seen this year, in the trend graph that I just talked to, most firms have actually cited that improved working capital performance will be the most likely way that they're going to fund the impact of the basis period reform. Indeed, if firms were to attain the upper quartile level of performance of their peer group, that would actually equate to a £1 billion plus cash release. So, there's plenty of cash tied up in working capital to off-set the impact of basis period reform, but in keeping with the headline of this year's survey, bold steps are needed in this area, if firms are going to be able to take advantage of this, because the historic trend really does not suggest that most firms will be likely to create sufficient additional liquidity purely through lock up improvement. So, other options, including partner capital calls or extended use of external funding are likely to have some role to play as part of that equation. Improving lock up and debtor days does require a sustained cultural change, especially in organisations where there's been limited focus, historically. Changing behaviour is, of course, not an overnight fix, but there are several levers that can be pulled, as firms look to improve lock up performance.

A few examples are, so looking at the operating model of business support and finance in particular, trying to find the right balance between having dedicated, specialised billing and collections capacity and capability. Some firms, indeed, are looking at the role of managed services, to get up that learning curve very quickly, but to balance efficiency and effectiveness, but also, enable the firm to focus on core activities at the same time. On processes, using more data-driven, centralised collections processes, with clear rules of the road for contractual minimum standards and commercial outcomes are playing an increasing role, and indeed, underpinning those processes with capabilities and platform solutions that can augment practice management system capability with automation, with workflow, leveraging some of those wider corporate sector best practices. Ultimately, in the long-run, building commercial awareness across all grades of practice staff and partners will be important in cultivating a lasting cash culture, where (TC 00:30:00) cash performance is not just seen as a finance problem. So, I'm going to hand over to Greg now, who's going to talk about strategy and transformation.

Gregory Jackson:

Hi, everyone. I'm Greg Jackson, Director here at PwC, leading our consulting work with law firms on strategy and business transformation. I've been working in-house and in the legal sector for the last ten years, and was previously the strategy director at Magic Circle Law Firm. I work on a wide variety of projects, from law firm combinations, firm strategy development, functional transformation, and tech strategy. So, hopefully, can bring some of that to bear in discussions around the slides. Leon, would you mind moving on to the first page, please? So, Leon spoke about the financial out-turn. We're seeing some of the underpinning issues being born out in the responses to our question around the key threats to firms for the next two years. I'm just going to speak briefly about four. So, the first, at the top, macro-economic volatility is often a topic that is quite challenging to get firms to think about because, to some firms and partners, can seem a bit esoteric. So, how does GDP impact my business? how does inflation impact me? Actually, most firms have probably been a bit underprepared for some of the macro risks that have crystallised, particularly thinking Russia-Ukraine. That is despite having the crisis of a pandemic less than two years before. So, I think one thing to take away is thinking about how you situate, you know, your team and the firm in scenario planning, to improve resilience, is going to be a critical factor for firms over the next couple of years, particularly with that as a key risk.

Secondly, we know that cyber security has been a topic that's been an area of focus in the survey for many years, and this is only going to increase as firms think hard about how they use client data and information in the AI space, in particular. Thirdly, Leon, Dan, both spoke about recovering cost inflation through pricing. It's going to be one of the defining factors of the sector, I think, in the next period, as we, sort of, touched on. Leon mentioned that costs have increased substantially, and these aren't necessarily being covered by rate increases or increases in chargeable hours, as we've talked about. This survey response suggests that this is a trend that's going to continue, as legal spend gets squeezed on the client side too. Finally, the last one I'm going to talk about, which has been the number one issue, as Rand talked about, for a number of years, a shortage of talent. I think one thing to think about hard in the next period is firms that make good long-term investment decisions around recruiting or retaining during this, sort of, slight softening in the market, will be the ones that, as we come out of that on the other side, and we turbo-charge to improve performance, and having worked in a firm, I suspect many people are thinking really hard about recruiting in the contentious space, because it looks like that's where the market's going. If we pause and just think about ourselves as more as investors, you could argue that actually the reverse should be true, and thinking about, how are you going to build out the transactional piece? I know that may seem counter-intuitive, right, but lateral hiring and building out practices takes time.

So, actually, thinking about the swing upwards is going to be really important, particularly when you think about integration and the success that it takes people to join firms and be successful. If we can move on, Leon, onto the next page. Just thinking about strategies to drive growth and margin improvement and what firms are thinking, and I guess being a firm that is able to be really structural on pricing and matter management set and get the price is going to be key for firms around growth and margin improvement. So, it's not surprising to see that commercial training is at the top of the list, and I think Dan will be delighted to hear that, given what he's just talked about, from a working capital perspective. I think, probably, interestingly, seeing the, kind of, new solutions space, which many firms are actively pursuing or considering, from a growth perspective, has come up the rankings significantly. We've seen, as you will all have know, a growing tendency, throughout the Top 100 to, kind of, build standalone brands, separate businesses, or adjacent products at the core of the law firm model, but ensuring there's proper investment, long-term management commitment to these approaches and their funding would be really key to their success in the long-term. Interestingly, a lot of firms working on their client account management, it's not surprising, given the points that Leon made at the start around needing to get more from what you already have, and that client account management's obviously a key part of cross-selling.

Kind of, knowing and seeing what everyone is doing, how to best share that, and that leverage and focus on building a greater number of touch-points an deinstitutionalising clients in the long-term is going to be critical in this slightly softened period. I should also say that there have been many more discussions with law firms in the last period about client service transformation, particularly from our perspective and how that's powered by transforming the CRM space. So, expect that to be something that continues in light of the, kind of, data point here. Finally, hiring rain-makers is unsurprisingly near the top with 83% of firms pursuing or considering that as a growth strategy. It's clearly a strategy that ensures lots of control, but is a slower method of building scale and building out in practice areas at speed. So, it's worth considering, like, 'Is that the right choice?' and how to execute that. There are a number of firms, obviously, pursuing tactical acquisition's across the Top 100, either into new practices, 62% responded on that basis, or new geographies, 55% responded on that basis. I think, anecdotally, across our law firm advisory group, we've seen a really significant increase in the number of discussions that we're having with law firms about engaging us to help them think through what a combination might look like. Leon, if you just move onto the next page. So, we're just going to touch on Gen AI, everyone's favourite topic, at the moment. Clearly, there's been a huge amount of hype in the sector about Gen AI and the impact it's going to have, in fact, our survey suggests that, across every single law firm grouping, there is an overwhelmingly positive view about the impact Gen AI will have.

66% positive in the Top Ten, 79% for 11 to 25, 65% for 26-50, and 67% for the 51-100, and that positivity is broadly aligned to an increased in productivity and an improvement in margin and creating more BD time. So, limited, although some concern around the technology, in terms of impact on firms, but much more in the positive space. Leon, could you move onto the next slide? I think, in a more, sort of, interesting and slight display of cognitive dissonance, despite that very positive view, there are also plenty of firms who are saying that they're not really doing that much at all with AI, and quite how you can answer that there is going to be an overwhelmingly positive impact, without really testing what the art of the possible is seems somewhat perplexing, albeit not that surprising, given the complexity of how to, kind of, bring these tools and how to use them. We also know that there's a huge variation in what firms are doing from Gen AI perspective, not least because it's difficult to sift through what really is genuine innovation and use case development and actually what is quite a lot of noise from a PR perspective. The intensity of pressure on firms to deliver more from both the lawyer experience and client perspective, particularly, I think, after Microsoft Copilot is released, is going to grow significantly, as those tools get embedded in day-to-day worth through lots of the applications that we use day-to-day.

I guess, the final point on AI, really, is to say if you're connecting the commercial points that both Dan and Leon have made around softening in pricing, softening in demand, and an increase in costs, and mirroring that to the kind of expectations that your clients are going to have about how transformative AI will be for service delivery, the two things, at the moment, are slightly diverged. One is much faster than the other, and of course, that's going to create a level of expectation and pressure on law firm delivery that's only going to increase in the next twelve to 24 months. Maybe we could just move on to talk about legal tech. There was a question just about technology, what's driving technology costs and, of course, legal tech, in that context, is only a small part of that, but obviously, as you can see on this page, there's been a significant increase in some of the segments around investment in legal tech, particularly in the Top Ten and 26-50, where we've seen a, kind of, doubling or more of spend. I think the key thing to think about here is, given that scale of investment and speed of investment, plus the introduction of, kind of, Gen AI into the mix, how are firms going to drive adoption, promote the right tools to the right groups, and get the right kind of ROI? It's not an easy thing to deliver, particularly if you are continuing to invest in bringing more tools online. It's really, really important to think about reviewing the total estate and thinking about usage and how you can get the best from what you have which, of course, will be a classic part of the statement, no doubt about that.

I guess we'll just move onto the last piece on ESG, and it's not because it denudes its importance of being the last page in our pack before Q&A, but I think, clearly, the ESG agenda is really important in the direct areas, as we've got here, on travel and suppliers and firms. We've seen firms doing a huge amount (TC 00:40:00) in this area over the last period, but we've also seen the agenda moving closer to the strategic core, as born out by some of the data results here, and not just for the sake of saying that to clients. That's really about, kind of, it becoming part of the strategic thinking, but I guess the corollary to that is that many firms that we work with are struggling to get the data and reporting right, particularly down through the supply chain, which is, obviously, a problem that's not unique to law firms, but is something that we're seeing a huge amount of work and investment on in the sector. I guess the last point to say, on this page, is that the lowest scoring area, selection of clients, is something that I think, probably, we'll see an increasing trend around it's importance. As some of you will know, the, kind of, increased importance of a view of advised emissions as a concept is only going to grow. Particularly as firms themselves are spending a bunch of time thinking about how that's measured, you know, through Legal Charter 1.5 and all sorts of other different areas where, probably, the importance of that as a theme is going to increase, I imagine, over the next period. So, I'll pause there and maybe hand back to Kate for the Q&A.

Kate:

Great. Well, really thanks to all of our speakers there, and I'm just trying to keep track of the questions, some of which are flowing in on chat and some on Q&A, so a reminder, if you can use the Q&A function for any questions, please, but one of the earlier questions that came in, I think, actually, perhaps Rand did her people session, was around whether the staff cost ratios are increasing more due to an increase in the number of staff employed or due to inflation, or a combination of both. To some extent, that will have been answered by having a look at that slide that showed the increase in headcount, but definitely, I think we saw, probably, above inflationary increases for many in staff costs that, sort of, kicked in towards the end of last year and flowed right through to this year. So, that was, certainly, a key theme of the survey, and when Rand put up her slide on staff turnover, the eagle-eyed of you may have noticed that, actually, for the Top Ten, actually staff turnover numbers increased, rather than decreased this year, and slightly bucked the trend. A lot of that is pressure from the US law firms that we're seeing, particularly at the top end of the market, and that has really been driving some of that inflationary staff pressure. We had another question here about, just to quickly deal with it, whether we have data in the survey above the Top 100, so 100 to 200. For those of you who are in that size of PFMs, we don't really have enough to produce a wide range of benchmarking data. We probably have a small amount of data, but most of the firms are in the Top 100. So, do feel free to come back to us if you have any questions on the smaller firms.

We've got one here around what's growing more quickly, staff costs or technology investment? I mean, I think, in the last year, it's probably been staff costs that have definitely had the impact on the profit and loss account, but of course, one thing to remember for technology investment is some of those costs are actually getting capitalised. So, you're not necessarily seeing them in our income statement slides. You will when they start being depreciated and flowing through in that way, but there's certainly a lot of capital spend. I don't know, Greg, if you want to pick up a little bit on all the investment that's also going into cloud transformation, and so, the things that we're seeing there?

Gregory:

Yes, I mean, I think, you know, typically, thinking about the big application moves that firms do around practice management systems, dot management systems, and then, broadly on, kind of, email management, etc. I think, probably, as firms get to the, kind of, choice point, many more firms are thinking, you know, 'We have to move into the next stage of things in the cloud.' I think from a more sophisticated position, there's clearly then a whole tonne of stuff which has to be exited, sunsetted (ph 44.18) in order to get out of data centres and move truly to the cloud. Then, think about the, kind of, you know, data unification that's going to be so important from a Gen AI perspective, to get the most value from Precedentdocs, client detail, CRM, etc. over this next period.

Kate:

Thanks, Greg. Dan, one here for you. Dan said firms are looking at analytics and process improvement to drive down lock up, but do you have a view on how that's distributed between fee-earning teams and business services, and actually, senior fee-earners can have a big impact on this, so how do you get partners at the front-end, or should you be leaving it to the back office staff?

Dan:

Yes, thank you. So, I think visibility's obviously a very good place to start, in any of the work that I do with law firms, most firms have got some degree of performance reporting and analytics, as relates to lock up, WIP days, debtor days, but perhaps the, I guess, extent to which that insight is intuitive, available to everyone, in a form that's, sort of, meaningful for each person's individual role in the pitch to catch cycle is often slightly limited. So, I think everything from engendering a sense of, kind of, healthy competition, having league tables that demonstrate your good performers and your less-good performers, is always quite helpful, but also, then breaking down your lock up measures into their constituent parts, so everyone from, you know, your billing and collections teams, your revenue management teams, in finance, through to your practice teams and partners, can really understand, like, what is their contribution to driving down lock up? Everything from payment terms through WIP days, debtor days, and all of the specific measures that you would look to see a collections team being measured against can really help take the performance to the next level and help everyone understand their piece of the puzzle.

Senior fee-earners do, inevitably, have a very big influence over any interactions with clients, but firms that are doing well on this topic are really, kind of, trying to address that balance with the right processes, the right measurements, so that fee-earners in the, sort of, practice teams have more confidence in that underlying finance infrastructure, so that, yes, ultimately, that can do more of the heavy-lifting.

Kate:

Thanks, Dan, and I'll spare Dan's blushes, but we have started, for some firms, doing a, sort of, managed service process for improvement of lock up and, actually, managing to shift the dial quite quickly. So, I think there is, sometimes, some resistance, actually, fee-earners can be very helpful, but they can also be resistant, and sometimes, be less-inclined to go and chase their staff and, actually, if you've done the work, you deserve to be paid for it. So, sometimes, the ruthless approach can help. Greg, possibly one more for you here. Do you think we'll see more private equity investment in the sector and how does that sit with the partnership model?

Gregory:

A great question. We have asked some questions on that in the document. So, it's part of the report, so definitely, take a look about how firms responded to that question. I think my view on it will be that there will be, obviously, tonnes of assets in the sector, whether that's divestments, carve-outs from firms. I think, probably, experience over the last period will chase some people a bit on that, and I think that's, obviously, something which, probably, not to say it means that there won't be any at all, but I think will make some people think carefully about that as a, kind of, funding approach. I do think, from an asset perspective, more broadly in the sector, people will be thinking hard about are there carve-outs from their firm that they might be able to either get PE investment or total buy-out from, I think.

Kate:

Thanks, Greg, and I guess on a connected note, in the past, we've seen more interest in IPOs, but I think this year none of our respondents said they were considering IPOs, so obviously, the markets have been tricky and that's slightly fallen away as an area of immediate interest. Leon, one here for you, I think. Am I right in seeing that property costs haven't changed much and given the adoption of agile working by most firms, surprised not to see percentage of property costs reducing?

Leon:

Yes, you're right, property costs, they have shifted a little bit, but I wouldn't say they were significant. They did come up on the screen and there's reasonably limited movement in property costs across the bandings, apart from Top 51-100 that saw property cost ratio fall quite significantly. That might indicate those smaller firms that are perhaps doing something with office space, linked with hybrid working, but I think, in the main, a number of firms are still holding the property space they had, pre-COVID. Although we do know some firms, you know, have reduced that, we do ask a question in the survey, 'Are you expecting to reduce your property space over the coming two or three years?' and I think, approximately, it was around a quarter to a third across the Top 100 indicated that there would be a reduction, but that reduction was no more than 20%, generally speaking, across those that answered in that way.

Kate:

Thanks, Leon, and Rand, perhaps a slightly linked question for you around, 'What are we (TC 00:50:00) now seeing in terms of balance of remote versus office-based working, and any views on the trends there?'

Rand:

Yes, I think it's interesting, because I think lots of assumptions were made after COVID that we would continue to transition to hybrid and ever-increasing virtual models and I don't think we're quite seeing that in the way that we would expect. So, I think what's been interesting is that the hybrid models are still in place, of course they are, but we're not seeing an increasing shift to virtual working, and actually, we are seeing an increasing shift in return to the office. It's not universal, it's different for different firms, it's different for different sectors, but there is a really mixed picture, at the moment.

Kate:

Great. Well, I'm mindful of time and there are a few questions we haven't had time to get to, but as I said, we will pick those up with those who've asked the questions. Hopefully, from today, you've got a sense of the key findings of the survey. We have a very active law firms advisory group here at PwC, we've got a number of colleagues across tax, internal audit, risk management, governance, M&A and deals who we haven't managed to squeeze into today's presentation, but please do get in touch with any of us, if you have anything that you would like us to pick up with you separately outside of this. Just as a reminder, we'll link you to the slides and the survey later today. Those of you who've participated in the survey, many thanks for that continuing support, and we will be in touch to do our one-to-one benchmarking sessions that we do with those firms who've participated. Just leaves me to say a very bug thank you to you all for joining, I think we've got record numbers on today, and to our panellists. So, I hope you've enjoyed it. Please do get in touch soon. Many thanks to all.