Snell: firms cannot ignore the need to invest heavily in IT
Big law firms will be using predictive analytics and artificial intelligence (AI) not only to predict where growth in services will be, but also which clients and cases are worth pursuing, according to PwC’s vision of the law firm of the future that also foresaw digital robots taking over “routine and standard human transactions”.
It also said intelligent pricing models using AI “will be able to understand client pricing sophistication and the use of algorithms will optimise profitability and resources”.
However, in its 25th annual survey of the top 100 firms, PwC found that only a “very few firms are re-thinking the way that law will be provided to clients from a holistic level and thinking beyond a five-year horizon”; most are simply looking to develop solutions for today’s specific problems.
“Firms should be considering what the future law firm will look like in a world where emerging technologies have become everyday solutions and consider how they get there,” it said in the forward-looking section of what was otherwise the usual retrospective report on the top 100’s financial performance over the past year.
PwC said that “megatrends” – such as the rise in digital technology, shifts in global economic power and changes in demographic/social power – were creating unprecedented levels of disruption.
“Clients are demanding more, historical barriers to entry are weakening and employee behaviours and requirements are changing. The legal sector is undoubtedly being impacted by these ‘megatrends’ and the successful law firm of tomorrow is going to look very different from the law firm of today.”
This was against a background of downward trends in profit margins in all but the top 10 firms since 2005. Margins in the firms ranked 26 to 50 have fallen from 30% to 23% in that time, “a trend that in our view is not sustainable”.
PwC found that only 28% of respondents thought their firms had a clear strategy for IT and were already seeing the benefits of the changes they have made.
“Firms leveraging technology as a key enabler for innovation will be able to leapfrog the competition with new business and revenue models. These firms are able to nurture creativity within the organisation by linking legal expertise with emerging technologies, prioritising the opportunities that add most value.
“This may be through partnership with leading start-ups and disruptors, creating legal technology incubators, or even building new in-house skills in areas such as programming and coding, agile product development and blockchain.”
On the use of predictive analytics and AI to win work, PwC said it was already starting to see the emergence of automated, intelligent market-scanning tools that provide insights on client and sector trends to spot opportunities, while big data and advanced analytics were allowing them to understand more and more about clients and what drove their behaviour.
The ‘big four’ firm forecast that more transactional roles in law firms could be significantly impacted by the use of robotic process automation, whereby digital robots replace routine and standard human transactions, operating around the clock. The impacts on firm structures, pricing, and resourcing “could be profound”, it said.
“Developments in automation of close out and completion tasks will continue to evolve. Current developments using workflow and document assembly tools will be supported by robotic process automation to drive efficiency and quality without the need for excessive standardisation or simplification across tasks such as bible creation and e-bundling.
“Intelligent billing engines will improve speed and accuracy of billing, and knowledge management and client feedback analytics will improve client service.
“In some cases new technologies such as blockchain could either enable or entirely displace the role of the lawyer, removing the need for trusted intermediaries, and enabling smart contracts to be carried out business-to-business or person-to-person.
“How firms adapt and respond to these opportunities and threats is yet to be seen.
The landscape is changing. Technology is enabling new firms to compete and undoubtedly for those firms embracing some of these technological changes, it is generating a competitive advantage.
“The case for IT investment has never been more compelling and firms will need to critically assess those areas that will make the most difference in their markets and to their client base. A critical challenge this investment creates is how to finance it in a partnership structure that typically fully distributes profits.”
The headline figures from the report were overall financial performance in the sector has been flat due to increased headcount and salary costs against a drop in chargeable hours and hourly rates.
David Snell, partner and leader of PwC’s law firms advisory group, said: “As confidence returned to the sector last year, firms increased headcount in anticipation of continued improving market conditions. However, with the market turning out to be more challenging than expected and with increased competition from US firms and new entrants, spare capacity is now an issue for firms.
“This situation is likely to be exacerbated following the EU referendum vote in favour of Brexit. Profit per equity partner and rate per hour are under pressure in a sector where supply outweighs demand.”
He said law firms could not ignore the need to invest heavily in technology. “The successful firms of the future are likely to provide global services supported by virtual collaboration and widespread use of AI. The adoption of new technologies, however, will make it imperative for firms to redefine roles of the existing workforce to avoid further spare capacity.”
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