Funding: Unlocking external investment is crucial for evolution
The main reason why larger law firms are moving away from traditional partnership structures is the lack of ability to raise external funding, a report has found.
Researchers also found that three-quarters of firms said competitive pressure had increased over the past year, up from two-thirds the year before.
More than a third of lawyers (35%) saw “alternative structures” as more effective than traditional partnership models.
The main driver in moving them away from LLPs was to increase their ability to raise external funds (46%), to improve governance and decision-making and “to retain funds more tax efficiently” (both on 42%).
This was followed by succession issues and “lack of desire in talent wanting to become a partner” (35%).
At the same time, when asked about future funding sources, most identified improvement in lock-up, followed by bank funding and partner capital, ahead of external investment and specialist law firm funding.
Researchers from accountants Evelyn Partners, supported by The Lawyer, analysed responses from over 230 senior lawyers, mainly partners in partnerships, for its annual law firm survey.
The report said: “Current ownership structures can significantly impact the ability to attract external investment and drive innovation…
“Growing demand for a diversification of ownership structures and the infusion of external capital that these structures can provide, may allow firms to invest in growth and innovation moving forwards.
“Unlocking external investment is crucial for evolution with external capital helping drive the adoption of AI and other innovative technologies, improving efficiency and client services. It also provides the financial flexibility to acquire specialised boutique firms, invest in talent and expand geographically.”
Almost all lawyers (96%) were confident in the business outlook for their firm, a figure little changed from the previous year, with an increase in those saying they were “very confident”.
However, 76% of law firms said competitive pressure in the legal profession had increased in the past year; the main sources of competition were direct competitors, niche law firms and international firms.
The proportion of lawyers who mentioned competition from online service providers grew in 2024, bringing it level with competition from in-house departments at client organisations.
Lawyers said “attracting and retaining the right people, as well as adopting innovative technology” were their two biggest challenges, with pressure on fees also a “key challenge”.
When it came to opportunities, investment in technology, attracting lateral hires and adapting to new ways of working led the way.
Merger and acquisition activity remained stable in the past year, with only 4% saying their firm planned to combine with a similar or bigger firm in the next 12 months.
The proportion of lawyers who said their firm planned to acquire a smaller firm in the next year remained static at 17%.
The three main reasons for considering M&A or hiring a new team in 2024 were developing a specialist practice area, geographic expansion within the UK, and diversification.
Three-quarters of lawyers said they were “very confident” or “confident” in their cybersecurity defences.
The top three challenges in protecting themselves were the increasing sophistication of cyber criminals (78%), the complexity of legal data and information systems (38%) and a feeling that there was a growing reliance on digital technology within law firms without proper safeguards (37%).
Other cybersecurity challenges included insufficient training and “the increasing frequency of remote work which people felt created more opportunities for cyber-attacks”.
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