Wolstenholme: Firms to transform operating models
The majority of large law firms outside of the top 10 are negative about the impact of generative artificial intelligence (GenAI) on their practices, new research has shown.
Accountancy giant PwC also predicted an increase in the number of firms accepting private equity investment in the next couple of years.
PwC’s 33rd annual survey of the top 100 law firms recorded yet another 12 months of strong financial performance, with almost all of them recording fee income growth in 2024, and 84% increasing profit. The number of respondents was undisclosed.
GenAI is seen as a threat to firms’ current business model because of its potential to reduce client demand and add to pressure on pricing, the report said.
“Most firms expect a significant proportion of existing fee earning work could be automated through the usage of AI tools. This will likely impact pricing and/or team structures across the wider sector.
“A significant majority (80%) of top 100 firms believe at least 6% of existing chargeable work could be automated and a third believe at least 16% of existing chargeable work could be automated; at this end of the spectrum, the scale of disruption would be unprecedented.”
The top 10 firms were the exceptions, with most seeing benefits from GenAI and “believing they will be able to use increased productivity gains to do more work for the same clients”.
Among the rest of the top 100, however, more than half expected Gen AI to have no impact on the volume of work, but to reduce pricing, while a fifth believed there would be reduced demand as clients adopted it themselves.
Nonetheless, law firms were investing heavily in GenAI tools, with almost 90% of the cohort having now implemented or trialled GenAI tools, compared to 55% in 2023.
Microsoft Copilot was the most widely implemented tool (30% of firms, 45% trialling it). Implementation of new GenAI products such as Harvey, CaseText, and Spellbook was low at 9%, but 63% were either trialling or considering them.
Nearly a quarter of the group, mostly within the top 50, have developed a proprietary GenAI tool using their own data.
But seeing any return from this investment was still in the future for most – only one firm has implemented applications that it has monetised and just 19% have reached the point where they are realising some productivity gains.
PwC said this year has witnessed “a significant rise in external investment within the legal services sector”.
It explained: “The increasing prevalence of alternative and disruptive business models has captured the attention of private equity firms, due to their potential to transform traditional practices and open up new avenues for growth.
“The disruptive influence of technology further amplifies the sector’s attractiveness, presenting opportunities for innovation and efficiency through automation and use of artificial intelligence.”
The report noted that, beyond providing financial support, external investors have also contributed management expertise and facilitated operational enhancements, “leading to substantial improvement in efficiency and profitability for law firms”.
Recent transactions such as DWF and Stowe Family Law “are all evidence of increasing private equity interest in the sector. As more success stories emerge, external investment in the sector is anticipated to increase significantly over the next couple of years”.
Lateral hires continued to be the number one option for inorganic growth, with 79% of respondents actively pursuing them. The majority of firms were actively pursuing or considering a tactical acquisition, to either build scale in geography (60%) or practice area/service line (58%).
A small minority of firms (18%) said they were actively pursuing a strategic merger or acquisition.
On the financial side, fee growth exceeded expectations set in last year’s survey – the top 10 recorded an increase of 11.6%, firms ranked 11-25 achieved 9.8%, those from 26-50 managed 11.7%, and the smaller 50 did the best, with 12.5%.
This was in addition to costs controls, which meant that 84% reported increases in profit, compared to 56% last year, with double-digit increases for all bands.
Net profit margins were: top 10, up 0.5pp to 41.2%; 11-25, up 0.3pp to 27.7%; 26-50, up 0.7pp to 25.2%; and 51-100, down 0.2pp to 23.5%. All bandings grew profit per full equity partner.
Firms increased overall chargeable hours as well average rates per hour, but at 6.9% only the bottom 50 firms pushed the latter beyond average inflation of 5.2%.
However, PwC showed that, over the last five years, top 10 firms have increased their average hourly rate by 40%, from £321 to £449.
It was 14% for those firms 11-25 (reaching £325), 23% for firms 26-50 (to £280) and 24% for firms 51-110 (£247).
Cyber risks were cited as the biggest threat to firms’ future growth ambitions, with 90% of all firms either extremely or somewhat concerned about them, with cyber-security spending up significantly among the top 25 firms in particular.
Macroeconomic volatility was the second most cited issue, although less so than last year. The threat of ‘Clients reducing demand through automation of legal work’ was a new option this year and 39% viewed this as either extremely or somewhat concerning.
Kate Wolstenholme, leader of PwC UK’s law firms advisory group, said: “Law firms are thriving. But with technology evolving at pace, the ability to innovate and adapt will be key to capitalise on the opportunities afforded by GenAI, data and cloud technologies.
“We expect firms to focus on the transformation of their operating models, and to rethink the size and shape of their future workforce.”
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