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Survey of Irish law firms2016/17

Confidence dips as uncertainty takes hold

Introduction

Executive Summary

Survey Highlights

Outlook for the legal sector

Firm performance

People

Mergers and Acquisitions

IT, Cyber Security and Social Media

Brexit

Leadership and Succession Planning

Dublin professional practices team

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Contents

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Smith & Williamson Freaney LimitedAuthorised to carry on investment business by the Institute of Chartered Accountants in Ireland. A member of Nexia International.

Smith & Williamson Freaney Audit Company Registered to carry on audit work and authorised to carry on investment business by the Institute of Chartered Accountants in Ireland. A member of Nexia International.

Smith & Williamson Investment Services LimitedAuthorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority in the UK, and regulated by the Central Bank of Ireland for conduct of business rules.

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Introduction

Survey methodologyOur national survey was carried out through telephone interviews in September and October 2016 by Amárach Research. 107 law firms took part in the survey this year (105 in 2015).The survey seeks to review current attitudes, and enquire about key issues and market sentiment in the legal sector. Typically survey respondents are managing partners or a senior partner.

Smith and Williamson has a heritage and expertise in accounting, tax and business services in Ireland stretching back to 1958. We established Smith & Williamson Investment Management in the Irish market in 2011 providing a suite of investment management, banking and pension services. The combination of accounting, tax and investment management services enable us to provide a unique offering in the Irish market place.

The Annual Smith & Williamson Irish Law Firm Survey highlights our continuing commitment to and partnership with the legal sector in Ireland. The legal sector continues to be an extremely important growth area for Smith & Williamson. Our professional practices team provides specialist accounting, tax, advisory, mergers and acquisition and succession planning services to Irish legal firms and professionals.

While this year’s survey sees continuing positivity, confidence and growth in the legal sector over the last 12 months, the clouds of Brexit and domestic and international political uncertainty overhang Ireland and have had a significant impact on confidence looking forward.

I wish to especially thank the partners in legal firms who gave their time and participated in the survey. I also thank Amárach Research for its work in conducting the research for this survey. I hope you enjoy our report setting out the analysis and findings of our survey.

The Survey of Irish law firms 2016/2017 includes:

• 13 of the top 20 Irish law firms• 17 mid-tier firms• 77 small firms.

Respondents’ head office locations:

• 69 in Dublin • 10 in rest of Leinster • 19 in Munster • 9 in Connacht and Ulster

Paul WyseManaging Director, Dublin Office

We are delighted to present our fifth Annual Smith & Williamson Irish Law Firm Survey. We also publish an annual survey of UK law firms.

Survey of Irish law firms 2016/2017Smith & Williamson

Uncertainty has caused confidence to dip. Brexit, political instability at home and abroad have fuelled concerns in the sector.

Executive summaryAn Uncertain Environment

Legal sector outlook in past 12 monthsTOP 20 FIRMS

2014 2015 2016 2014 2015 2016

Improved 84% 74% 55% 88% 100% 54%

Remained stable 13% 21% 37% 6% 0% 37%

Deteriorated 3% 5% 8% 6% 0% 8%

TOP 20 FIRMSLegal sector outlook in next 12 months

2014 2015 2016 2014 2015 2016

Improved 79% 74% 52% 88% 100% 38%

Remained stable 21% 24% 40% 12% 0% 46%

Deteriorated 0% 2% 8% 0% 0% 16%

Ireland has enjoyed continuing improving economic conditions this year. There has been growth in consumption and employment. GDP growth is also forecasted at 4.0% for 2016 and 3.5% for 2017 in the latest Central Bank of Ireland quarterly economic commentary. The economic positivity, however, is overshadowed by Brexit and the stability/instability of the recently elected and new style Irish government. Concerns were also fuelled by potential outcomes in the US presidential elections and the elections in France and Germany due to take place in 2017. These issues have affected business confidence which is reflected in a noticeable decline in business confidence in this year’s survey. Only 55% of law firms (74% in 2015) and 54% of the top 20 firms (100% in 2015) believe the business outlook for the legal sector in Ireland improved in the last 12 months with 52% of firms and only 38% of the top 20 firms surveyed expecting an improved outlook in 2017.

Paul Wyse

There is no doubt that Brexit will have an impact on the Irish economy. Until we know the terms of the UK’s exit from the EU we will not be able to gauge the impact. Brexit has created a period of uncertainty that will result in a slowdown in investment and growth. All of the top 20 firms (59% of all firms) surveyed have suggested that Brexit will have a significant impact on the legal sector over the next five years.

In the shorter term there is a glass half full/glass half empty feel to our survey results with 36% of the firms surveyed (31% of the top 20 firms) believing that Brexit will have a positive impact on the legal sector and 44% (62% of the top 20 firms) believing it will have a negative impact. Most firms identified the economy and uncertainty as areas that concern them most.

The majority of firms do not expect significant negative impact on their existing client base or levels of business in the short term. One in two, however, are concerned about levels of new business in the longer term. Most firms (87%) expect more UK law firms to open offices in Dublin through a strategy of merger or acquisition rather than greenfield starts.

Brexit: Opportunities or Threats??

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This year’s survey shows continued improvement in trading conditions and many firms enjoying increased revenues and profits again in 2016.

• 64% of respondent firms (84% of the top 20) are showing an increase in revenues and one in two of those firms enjoying an increase in excess of 10%.

• Profits increased in 57% of firms surveyed which is down from 64% of respondents in 2015 (62% of the top 20 firms also down from 73% in 2015).

• Almost half of these firms (44%) saw profits grow by more than 10% (this applies for 34% of the top 20 firms) this year.

• This is contrasted by 11% of firms surveyed and 15% of the top 20 firms seeing a decrease in profits in the last 12 months.

Maintaining profitability continues to be one of the main challenges for the sector with increasing fee pressures and pay and operating cost increases continuing. Increases in operating costs were reported primarily in the larger firms (46%), in Dublin firms (38%) and less so in firms outside Dublin (19%). Salary pressures, additional staff numbers and property costs are the primary drivers of these increases. Marketing and IT spend have increased and are running each at c. 5% of turnover for most firms.

These numbers help to explain why almost two in three firms stated that the outlook for their firm improved in 2016 and were confident about the outlook for their firm in 2017.

Continuing Improvement in Firm Performance for 2016

Profit growth

Revenue growth

2015 2016 2015 2016 2016 2016

Increased 70% 64% 93% 84% 69% 53%

Remained the same 25% 25% 7% 8% 20% 36%

Decreased 5% 9% 0% 8% 10% 8%

Refused / Don't know 0% 2% 0% 0% 1% 3%

TOP 20 FIRMS DUBLIN REST OF COUNTRY

ALL FIRMS

2015 2016 2015 2016 2016 2016

Increased 64% 57% 73% 62% 62% 47%


Decreased 8% 11% 7% 15% 13% 8%

Refused / Don't know 0% 5% 0% 0% 2% 9%


ALL FIRMS

Maintaining profitability, pressure on fees and managing cashflows remain the key issues for firms over the next 12 months. Managing cash flows is expected to continue to present issues for many firms (51%) in the next 12 months as debtors, and work in progress, increase as a result of higher revenues.

Maintaining profitability is seen by most firms (54%) as the biggest challenge facing them over the next few years as a result of increased competition, fee pressures and increasing salary and operating costs. Firms report continuing pressure on fees in the last year.

While overall the outlook was positive, the economy was identified by almost half of respondents as a key area of concern over the next 12 months. Public sector unrest, the new style domestic government, Brexit and uncertainty around the impact of the US presidential elections, followed by elections in France and Germany in 2017 have all fueled these concerns.

Key issues: A more competitive landscape in the legal sector

Survey of Irish law firms 2016/2017

Actions taken by firmsMost firms, 74% (77% of top 20 firms) have made changes to business processes to improve their efficiency. Many firms have invested in technology to improve their processes and reduce their operating costs.

Firms are continuing to invest to grow revenues and market share. A more strategic approach to business development and brand differentiation is now required to make progress in a very competitive marketplace. As a result 74% of firms have continued to increase sales and marketing efforts (92% of the top 20 firms) in the last 12 months. Many have targeted new markets (53% overall and 92% of the top 20 firms) or introduced new services (36% overall and 69% of the top 20 firms) in the last 12 months.

While many firms have reduced or agreed to more fixed fees for certain work (52%) it is noteworthy that with growth in the economy and increases in salary and operating costs in firms that over half of the firms surveyed (52%) have increased their fees in 2016.

People - Improving Opportunities for all levelsMost of the top 20 firms (92%) surveyed have increased staff numbers this year as did almost half of all firms surveyed (48%). Similar numbers of firms expect their staff numbers to increase in 2017. In contrast to the overall picture only 28% of firms outside Dublin increased staff numbers.

The increase in staffing levels means competition for talent continues to be a major challenge for firms. The recruitment and retention of staff is identified again in our survey this year as increasingly presenting difficulties for the sector. It remains a key issue, according to 35% of all firms surveyed and for 69% of the top 20 firms over the next 12 months.

The sector has also seen a continuing improvement in employment opportunities for trainee solicitors and newly qualified solicitors. More firms reported having vacancies this year (40%) than in 2015 (33%).

Staff Numbers

2015 2016 2015 2016 2016 2016

Increased 49% 48% 100% 92% 58% 28%


Decreased 11% 4% 0% 0% 4% 6%


ALL FIRMS

Reward

Finding and retaining the right people is seen as a key challenge by firms. This is recognised in the increasing importance of both financial and non-financial rewards in attracting talented people. Changing reward and remuneration models is seen by almost half of the firms surveyed (47%) as a key factor impacting the profession in the next five years.

This means identifying the rewards and retention mechanisms that employees value most. The most important reward mechanism firms identified in attracting and retaining talent is enabling more flexible working arrangements with 45% (77% of the top 20 firms) looking at increasing the use of this strategy over the next few years.

Opportunities identified by firmsThe opportunities most identified by firms over the next two to three years were:focus on specialist sectors 55%, investment in technology 54%, expansion in Ireland 47%, and investing in business development and marketing 47%. Top 20 firms identified lateral hires (61%) as one of their preferred growth strategies.

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IT – continued investment while cyber attacks continue to increaseIT spend has increased again this year and is now running at c 5.6% of turnover including IT staffing costs in many firms. Technology will continue to be critical to success in the sector with 54% identifying this as the most significant opportunity for their firms in the medium term. For many firms investing in technology is seen as the key to gaining a competitive edge by streamlining operations and enhancing client service.

There has been a significant increase in cyber attacks reported in this year’s survey with 29% of all respondent firms reporting such attacks significantly up from 20% in 2015. There has also been an increase in reported attacks for top 20 firms where 38% have reported that they were subject to cyber attacks in the last 12 months.

Mergers & Acquisitions - Brexit and LLP structures may increase activityOur survey findings again highlight the focus by Irish law firms on seeking to acquire individual teams or individual lateral hires to expand or strengthen their services offering to clients. A similar number of firms compared to last year’s survey (40%), have been approached over the last 2 years for merger discussions (69% of top 20 firms). It is anticipated that more firms will be approached as UK law firms seek to open offices in Dublin.

Almost two in three firms have stated (69% of the top 20 firms) that they intend to convert to an LLP and most of them intend to do so within the next two years (44% of top 20 firms).

Leadership and Succession in an era of changeThe importance of effective leadership within a firm has never been more pertinent. Firms need to ensure they nurture the right people with the right skills into leadership roles.

A largely informal approach to succession planning is still the norm across the sector. Most firms (82%) have informal plans for identifying future partners and managing partners (92%). This is not the case in the larger top 20 firms where most have formal processes in place for entry to partner level (69%) but, surprisingly, only 23% of these firms have a formal process for appointing managing partners.

When it comes to retirement planning most firms (60%) leave it to the partners themselvesto get advice on retirement and pension planning (85% in top 20 firms). Firms therefore runthe risk that partners do nothing or fail to plan early or adequately for retirement. As peopleare living longer more want to work (or have to work because of inadequate pension pots)beyond 65. This can potentially leave firms with an ageing partner group and client base. Thisin turn can have implications on the ability of firms to offer the next generation the careerprogression they need and are looking for.

More than one in three firms (35%) reported pay increases of 3%+ in the last 12 months. Many smaller firms (39%) made no pay increases in the last 12 months (36% in 2015). For firms outside Dublin, 69% made no pay increases and only 19% increased pay by more than 3%. For top 20 firms 46% reported increases in excess of 5% and 84% reported increases in excess of 3%.


Survey highlights

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There has been a significant reduction in confidence in 2016 and in the outlook for 2017 in the legal sector.

The key issues facing the legal sector over the next 12 months continue to be:• Maintaining profitability • Pressure on fees• Cash flow pressures• Recruitment and retention

of staff (top 20 firms).

Revenues increased in 64% of firms in the last year (84% of the top 20 firms).

Profits increased in 57% of firms in the last year (62% of the top 20 firms). Almost one in two (44%) of these firms saw increases in excess of 10% in profits.

One in two firms have increased their staff numbers in 2016 (92% of the top 20 firms) and expect to increase staff numbers in 2017.

One in three firms implemented a pay increase of more than 3% last year. Almost one in two of the top 20 law firms made pay increases in excess of 5% last year.

One in two firms surveyed made no change to levels of pay (39%) or decreased pay (11%).

Three in four of the firms surveyed have increased their spend on marketing and business development in the last 12 months and have improved their business processes to become more efficient.

Firms see investing in technology and focusing on specialist sectors as the main opportunities for them over the next few years.

Almost two in three of the top 20 firms see lateral hires as the key opportunity for them to grow their practices over the next few years.

Most firms (59%) and all of the top 20 firms think Brexit will have a significant impact on the legal profession over the next five years.

Shorter term there are mixed views as to whether firms see Brexit as a threat or opportunity with 44% seeing it as a negative for the sector (62% of top 20).Two in three firms see it as less of a threat to their firm and anticipate no impact or a positive impact on their firm.

Most respondents anticipate that Brexit will result in more UK law firms opening offices in Dublin and more mergers and acquisitions by UK law firms in Ireland.

Almost two in three firms surveyed have stated that they intend to convert their practice to an LLP.

There has been a near 50% increase in cyber attacks reported in this year’s survey by law firms with 29% of respondents reporting that they have had cyber attacks on their IT systems in the last 12 months (38% of the top 20 firms up from 33%).

Two in three law firms do not have formal succession planning in place.

Smith & Williamson

Outlook for the legal sector

Smith & Williamson

Outlook for the legal sectorThe economyThe Irish economy has continued to perform well in 2016 with anticipated GDP growth of around 4% (2015: 5.8%). This signals a clear easing in the pace of growth compared to the levels experienced from 2010 to 2015. The seasonally adjusted unemployment rate fell to 7.9% in September 2016 which represents the lowest unemployment level since October 2008.

While activity and growth across the legal sector have been robust in 2016, confidence in the economy has been sharply impacted by a number of events and political uncertainty.

• Brexit - Following the initial surprise of the vote, the key uncertainty now is the form and timing that it will ultimately take. A recent business sentiment survey1 found that one in 10 firms is looking at potential relocation into or out of Ireland.

• Sterling - A knock-on-effect of the Brexit vote is the weakness of sterling. Previous fluctuations in sterling have been relatively short-lived, the worry for businesses is that a €/stg£ rate of £0.90 will represent the new norm.

• Corporation Tax - Following the recent Apple ruling, the EU is pursuing a definite strategy to harmonise the corporation tax take across the EU.

• Political uncertainty – at home with the recently elected new style Irish Government and the instability that comes with it and internationally with elections due to be held in France and Germany in June 2017, and the recently held US elections.

Survey ResultsThe survey findings reflect these uncertainties where despite continued growth through 2016, respondent firms signalled weaker expectations for the next 12 months.

Legal sector outlook all firms

While activity and growth across the legal sector has been robust in 2016, confidence in the economy has been sharply impacted by a number of events and political uncertainty.

Seán McNamara

1KBC/ICAI business sentiment survey

Outlook All Firms Last 12 Months

90%80%70%60%50%40%30%20%10%0%

2015 20152014 20142016 2016

Outlook All Firms Next 12 Months

ImprovedRemainedStableDeteriorated

100%

11Survey of Irish law firms 2016/2017


Overall, 2016 has seen deterioration in the business outlook for the legal sector. Where 74% of firms signalled an improvement in outlook for 2015, this has reduced to 55% for 2016. The reduction in confidence is even more apparent in the Top 20 firms, where 100% reported improvement for 2015, this has reduced to 54% in 2016.

The outlook for 2017 shows a further reduction in confidence for the sector with 52% of firms suggesting an improvement in outlook, 42% of firms outside of Dublin and more significantly only 38% of the top 20 firms.

Key issues facing the legal sector in the next 12 months More firms (64%) are reporting that competitive pressure in the sector continues to increase and most of the top 20 firms are reporting this increase also (85%).

Maintaining profitability is the key issue facing the sector in the next 12 months again this year. Pay and increasing operating costs including rents, added to fee pressures are obvious concerns for the sector. Managing cash flow continues to be of concern to firms outside the top 20 and is the number one issue identified by respondents outside of Dublin. Staff recruitment and retention is becoming an increasing issue for 44% of Dublin firms, 69% of Top 20 firms (17% of firms, outside Dublin).

The competition for staff in Dublin firms is also evident in increasing payroll costs where 69% of Dublin firms report making pay increases compared to 27% of firms outside Dublin. Dublin firms and the top 20 firms are reporting more concern around the economy post Brexit than regional firms which is slightly surprising given the predominance of the agri-food sector regionally.

Legal sector outlook top 20 firms

Outlook Top 20 Firms Last 12 Months

90%80%70%60%50%40%30%20%10%0%

2015 20152014 20142016 2016

Outlook Top 20 Firms Next 12 Months

ImprovedRemainedStableDeteriorated

100%

Smith & Williamson

The key issues identified in this year’s survey by legal firms that will impact on the legal profession over the next five years are:

• The use of technology to manage the firm (77% of all firms and 84% of Top 20 firms).• The use of technology to manage interactions with clients (69% of firms and 61% of Top 20).• Changing fee structures was identified as the main challenge in last year’s survey and still

represents a key challenge for the sector in the years ahead according to 75% (77% of top 20 firms) of respondents.

Firms continue to look to invest in technology as a means of reducing costs, increase efficiency in processes and opening up new communication channels with clients to deliver efficient, effective and relevant services. The top 20 firms see these as more significant challenges for the future.

All of the top 20 firms have responded that Brexit will have a significant or very significant impact on the legal profession over the next few years (59% of firms in general). Globalisation is also an understandable issue given markets served and the international exposure of the top 20 firms. Most larger firms continue to invest and see marketing and brand development as a key strategic issue in their competitive landscape.

Significant issues for the legal sector over the next five years

Key issues facing the legal sector for the next 12 months

ALL FIRMS TOP 20ALL FIRMS

DUBLINALL FIRMS EX DUBLIN

Maintaining profitability 54% 62% 54% 56%

Economy 46% 54% 49% 39%

Managing cash flow 51% 23% 45% 64%

Pressure on fees 49% 23% 45% 56%

Recruitment & retention of staff 35% 69% 44% 17%

Brexit 33% 62% 35% 28%

100%90%80%70%60%50%40%30%20%10%0%

Top 20 firms

All firms

Outsourcing of business functions

Globalisation Flexible working

arrangements

Changing reward/

remuneration models

Marketing and brand

development

Changing fee structures, e.g. fixed

fees, value billing

Use of technology to manage the

firm

Brexit Use of technology to manage the

firms


Firm performance and key issues


Firm performance and key issues

Law firms report strong revenue and profitability growth and look to lateral hires and expansion domestically to drive continued growth into 2017.

The results of this year’s survey continue the trend over the past three years with most firms enjoying improved performances in the last year. However the number of firms reporting growth over the last 12 months dropped slightly while the number of firms forecasting growth over the next 12 months is well down on the numbers we reported in 2014 and 2015.

A significant 63% of firms surveyed (70% in 2015) reported an improved outlook for their business in the last 12 months. Furthermore, 58% (70% in 2015) are expecting an improved outlook in 2017. The uncertainty caused by the election outcome in Ireland and the new style Government formed has caused a degree of uncertainty regarding its stability and this allied to public sector unease the outcome of the Brexit vote and concerns about the outcome of the US elections has led to a noticeable decrease in confidence by firms for 2017.

Confidence for an improved outlook by regional firms and Dublin firms were at similar levels (two in three firms) for the last 12 months. There is however less confidence in regional firms for 2017 with only 50% anticipating an improvement for their firms as against 62% in Dublin.

Most Top 20 firms, 69% (87% in 2015), enjoyed an improved outlook over the last 12 months but 62%, a significant drop on last year’s 87%, expect further improvement over the next 12 months.

The continuing improvement in trading conditions has resulted in many firms (64%) enjoying increased revenues again in 2016 (84% of the top 20). Significantly, 50% of those firms have achieved a revenue increase in the last twelve months of more than 10%.

Profits have increased in more than half of firms surveyed (62% of the top 20) with 44% of those firms reporting a profit increase of greater than 10%. Overall there is a slight downward trend in the numbers of firms reporting increased profits with a greater number of the top 20 firms reporting decreased profits (15% compared with 7% in 2015).

Revenues have increased in 53% of respondent firms outside Dublin as against 69% of Dublin firms. Profits have grown in 47% of firms outside Dublin as against 62% of Dublin firms.

Firm outlook in past 12 months

Firm outlook in next 12 months

Revenues and Profits

2014 2015 2016Top 202014

Top 20 2015

Top 20 2016

Improved 77% 70% 63% 92% 87% 69%

Remained stable 21% 28% 36% 8% 13% 31%

Deteriorated 2% 2% 1% 0% 0% 0%

2014 2015 2016Top 202014

Top 20 2015

Top 20 2016

Improved 81% 70% 58% 83% 87% 62%

Remained stable 18% 30% 41% 17% 13% 38%

Will deteriorate 1% 0% 1% 0% 0% 0%

Dan Holland

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2014 2015 2016Top 202014

Top 20 2015

Top 20 2016

Increased 55% 64% 57% 58% 73% 62%


Decreased 10% 8% 11% 17% 7% 15%

Refused 2% 0% 5% 8% 0% 0%

Firm revenues in past 12 months

Firm profits in past 12 months

Property/Conveyancing, Litigation/Dispute Resolution and Corporate/Commercial continue to be the principal practice areas driving growth in many firms. Larger firms report a continuation of the significant growth across most practice areas over the last 12 months with an expectation for most areas to perform strongly in 2017.

Areas of practice growth

2014 2015 2016Top 202014

Top 20 2015

Top 20 2016

Increased 64% 70% 64% 83% 93% 84%


Decreased 10% 5% 9% 0% 0% 8%

Don’t know 0% 0% 2% 0% 0% 0%

2016 Top 20

Lateral Hires 22% 61%

Expansion in Ireland 47% 31%

Overseas Expansion 8% 30%

Investment in Technology 54% 46%

Investment in Training 26% 23%

Focus on Specialist Sectors 55% 54%

Investment in Business Development and Marketing 47% 53%

The business opportunities identified as drivers of growth by firms over the next two to three years were expansion in Ireland, focus on specialist sectors, investment in technologyand investment in business development and marketing.

Top 20 firms also identified Lateral Hires as an area of opportunity. This highlights the shift towards specialist services, with many firms hiring individual partners and teams in specialist areas of law.

When asked to identify the main areas of opportunity firms responded as follows:

These results broadly mirror the results of our Survey of UK Law Firms with Focus on Specialist Sectors, UK expansion and Lateral Hires being the three main areas of opportunity identified by UK firms.

Business opportunities


Looking forward, the main challenges identified by firms over the next two to three years were: The economy (33% of firms), maintaining profitability (54%), recruitment and retention of staff (32%) and managing cash flows (37%).

For the top 20 firms the following additional issues were highlighted Brexit (54%) and new types of competition (38%).

The results of the Smith & Williamson Survey of UK Law Firms 2016 identified recruitment and retention of staff as the most significant challenge for UK firms with 56% of firms listing it as their number one challenge (the UK survey was published prior to the EU referendum).

Most firms reacted to the challenges of the past 12 months by increasing marketing efforts, targeting new markets and changing business processes to become more efficient.

While more than one in two firms identified that they had reduced or agreed to more fixed fees on assignments a similar number stated that they had increased fees to improve performance.

Top three key issues facing your firm over the next two to three years

Actions taken by firms to improve performance

Key Issues for Firms

2016 Top 20

Economy 33% 23%

Recruitment & retention of staff 32% 23%

Maintaining profitability 54% 54%

Managing cash flow 37% 23%

Pressure on fees 33% 8%

Office space 8% 23%

Brexit 19% 54%

New types of Competition 12% 38%

2015 2016 Top 20-2015 Top 20- 2016

Availability of finance 19% 23% 7% 8%

Downward pressure on fees 47% 41% 33% 39%

Attracting/retaining talented professionals 28% 30% 73% 38%

Increased competition 29% 29% 33% 31%

Increasing operating costs 28% 32% 27% 46%

Cash flow pressures 32% 37% 20% 39%

While most firms reported strong revenue and profitability growth in the last 12 months a key issue facing the sector is maintaining profitability due to a challenging fees environment and increased operating costs.

The issues which had the most significant impact on firms in the past 12 months were downward pressure on fees (41% of firms), closely followed by cash flow pressures (37%), increased operating costs (32%) and attracting/retaining talented professionals (30%).

The same issues challenged the larger firms though increased operating costs was the most significant challenge facing 46% of the Top 20 firms.

Issues significantly impacting your firm in the last 12 months

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Three in four of the top 20 firms had engaged advisors/third party support to improve performance in the last 12 months and more than two in three introduced new services.

Note – question on increased fees not asked in 2015 survey.

Actions taken by law firms to improve performance

2015 2016 Top 20-2015 Top 20- 2016

Increased fees N/a 52% N/a 54%

Increased sales/marketing efforts 61% 74% 87% 92%

Discounted/reduced fees/agreed to more fixed fees 64% 52% 73% 62%

Reduced operating costs 50% 42% 33% 31%

Engaged professional advisors/third party support 46% 48% 60% 77%

Targeted new markets 52% 53% 80% 92%

Introduced new services 39% 36% 73% 69%

Changed business process(es) to be more efficient 76% 74% 93% 77%

Cash flow pressures continue to affect firms with 37% (39% of Top 20) listing it as one of the significant issues faced in the past 12 months. Working capital management will be a continual challenge for many law firms with a requirement for training and support for all fee earners to improve working capital performance.

Achieving a lock-up (combined debtors and work-in progress) profile of less than 120 days remains a challenge. One in five firms indicated working capital tied up in debtors at over 90 days and almost one in three reporting working capital tied up in work in progress at over 90 days. It is notable that the Top 20 firms have made progress since 2015 with all firms reporting no debtors at greater than 90 days compared with one in three reporting debtors greater than 90 days in last year’s survey.

Working capital

Our ViewWith the majority of firms predicting continued revenue growth into 2017 the management of the lock-up cycle will be crucial. If more cash is tied up in lock-up more partner capital or bank funding will be required to finance working capital. Regular process-billing and work-in progress reviews should be implemented on all accounts in order to improve working capital management. Most Irish law firms have more than 180 days lock up and still lag behind top UK firms where average lock up periods range between 140 days and 160 days. We note however that some of the top 20 firms are measuring lock up days by partner, as a metric of evaluating partner performance.

Working capital days tied up in debtors and work in progress

% of working capital tied up in debtor days

2015 2016 Top 20

Up to 30 days 23% 26% 8%

31 – 60 days 23% 25% 15%

61 – 90 days 23% 24% 77%

91 – 120 days 10% 7% 0%

121+ days 9% 7% 0%

Don’t know 12% 11% 0%

% of working capital days tied up in work in progress

2015 2016 Top 20

Up to 30 days 11% 11% 0%

31 – 60 days 16% 13% 23%

61 – 90 days 21% 20% 31%

91 – 120 days 10% 14% 31%

121+ days 25% 29% 15%

Don’t know 17% 13% 0%

People


Recruitment and retention of staff will be a key issue for firms as many anticipate an increasing presence of UK Law firms in the market and more lateral hires inevitable.

PeopleStaff Numbers

Staff numbers continue to increase in most of the Top 20 firms and in many Dublin firms (58%), with a lower percentage of firms outside Dublin (28%) reporting increases. More firms are reporting vacancies this year (40%) with more trainees being taken on and more newly qualified staff being retained by firms. Recruitment within the sector therefore remains a key issue.

According to the latest Law Society Annual Report (2015) there are 9762 practicing solicitors of which 7,807 work in Law firms of which 23% are employed in the top 20 firms. The top 20 firms reported an increase of 5% in the number of qualified solicitors employed by them over 2014. It is important to note that there was an increase across the sector generally of 4%. Most of this growth in numbers is happening still in Dublin.

Our survey reveals that respondents anticipate that more UK firms will look to establish a presence in Ireland post Brexit either through M&A or greenfield set up. The competition for talented staff will therefore increase and increased numbers of lateral hires can be anticipated as most top UK and Irish law firms see this as a key opportunity for them for the expansion of their business.

Vacancies

40% of firms report having vacancies in 2016 which is an increase from one in three law firms reporting vacancies in 2015. Most of the top 20 firms report that they have vacancies currently also. With the number of vacancies on the increase it is clear that there is a gap in the ready availability of talent to fill these roles.

Áine Reidy

Firms need to consider their staffing requirements carefully and give potential recruits clear and compelling reasons to join and remain with them. This is not just about pay. It is about the working culture of the firm and a clear path to career development, including a clear roadmap to partnership, for those that merit it, and a rewarding and fulfilling career for those with different career aspirations.

This year we looked at how effective firms see themselves at identifying competencies in employees for progression, providing appropriate training and providing a clear roadmap to partnership. The top 20 firms have a clear view and identify themselves as being effective in these areas.

Recruitment and retention

Reported Vacancies Dublin, Ex Dublin & Top 20

None

1 to 4

5 to 10

10+

Don’t Know

100%90%80%70%60%50%40%30%20%10%0%

Dublin Ex Dublin Top 20

Smith & Williamson

With almost 40% of solicitors aged 39 or less, people development is a key issue for the sector. Top tier firms have confidence in their systems of identification and development of talent and have identified reward mechanisms to attract and retain talent.

Firms need to identify people at risk of leaving at all levels as recruitment is a costly exercise. Open, honest and regular reviews and communication with staff should help. High staff morale and good working culture are strong ingredients in retaining staff. Most of the top 20 firms (69%) have a defined formal process for entry to partner level while only 18% of firms in general have this. Most firms appear to operate informal paths to career progression.

In light of the increasing significance for firms in seeking to attract and retain staff it remains noteworthy that only 5% of firms report using social media as a method of recruiting. More traditional methods of recruitment may require to be augmented with a more modern approach.

TraineesOver the past 12 months one in four firms reported increasing trainee numbers in 2016. Top 20 firms however increased their trainee headcount in 77% of cases with the remainder keeping their intake the same over the previous 12 month period. More than one in three Dublin firms increased intake in the last 12 months compared with just 3% of firms outside of Dublin. Looking ahead a similar picture emerges with 26% of firms overall expecting to increase trainee intake compared to 62% of the Top 20 firms.

Pay Overall there is a trend of moderation in salary increases from 2015 with a decrease in firms offering increases of 5% or more down from 29% in 2015 to 18% in 2016. The numbers of firms paying increases of between 1% and 5% remained relatively stable year on year with a slight increase in the number of firms making no increases. One in two firms reported that salaries (excluding partners) have not increased (39%) or have decreased (11%) in the last 12 months.

Identifying the competencies required for progression/promotion

Providing appropriate training for progression/promotion

Providing a clear roadmap to partnership for those who want it

EffectiveTo

p 20

Fir

ms

All

Firm

s

Effective

Ineffective

Ineffective

Don’t Know

Firm effectiveness in identifying and developing talent



Increasing use of reward mechanisms

Most top 20 firms reported paying increases of more than 3% with more than one in three paying 4-5% and almost half the firms paying 5% plus. We believe salaries will continue to be an area of increasing pressure in the coming 12 months in particular in Dublin.

Reward Mechanisms: The FutureThe recruitment and retention of staff is a key issue for all professional firms. Sourcing, hiring, training, developing and retaining quality individuals is the key to survival, future growth and success.

Staff recruitment and retention are increasingly presenting difficulties for firms. As a result firms are looking to apply a range of mechanisms to address employee needs and aspirations. Our survey respondents indicate the number one reward firms will be implementing over the coming three years is flexible benefits (45% of all firms, 77% of top 20 firms, 31% of firms outside Dublin). Many firms see increasing financial reward (42% of all firms, 62% of Top 20, 28% ex Dublin) as a key tool going forward also. It appears that unpaid leave (54%) and sabbaticals (38%) are more likely to be a bigger part of the reward mechanisms in Top 20 firms in the future.

All Firms

Top 20

100%

80%

60%

40%

20%

0%Flexible Working

Cash-based financial rewards

Flexible benefits

Unpaid Leave Sabbaticals

Pay increases and decreases in the last 12 months

60%

50%

40%

30%

20%

10%

0%2014 2015 2016

No increase

Pay Decreases

1% - 3%

3% - 5%

5%+

Smith & Williamson

Mergers & Acquisitions


Mergers & acquisitions For many firms, a merger or acquisition, or making lateral hires, is the logical progression to expand and develop services and new practice areas. This is also a more immediate approach than to have to invest resources and develop the skillsets necessary by a firm on its own to tackle a particular sector, a new market segment or area of law.

There have been very few significant mergers in the Irish legal sector over the last five years. Most of the mergers have been between smaller firms to deal with succession issues and or to improve scale in a particular marketplace. The growth of the larger legal firms has been mainly organic, supplemented by lateral hires and/or smaller firm mergers and expansion in international markets.

Survey results

Lateral Hires

Many firms expand their business and introduce new service lines to their business through lateral hires. Most of the top 20 firms surveyed (74%) took on more than 4 lateral hires in the past year (79% in 2015) and 31% took on more than 10. Almost two in three (61%) of the top 20 firms surveyed see lateral hires as one of the biggest opportunities for their firms over the next two to three years.

How many lateral hires has your firm taken from other firms in the past year?

The level of merger activity is expected by most respondent firms to increase over the next year. The level of discussions initiated by firms with a view to a potential merger or team acquisition in the last two years has remained fairly constant at almost one-in-four firms and 31% of the top 20 firms.

This contrasts with the number of firms who have been approached with a view to a potential merger or team acquisition in the last two years at 40% (37% in 2015). The number of top 20 firms approached is notably higher with more than two in three firms approached in the last two years.

Brexit and the adoption of LLP structures is anticipated to result in an increase in UK firms merger and acquisition activity in Ireland.

Paul Wyse

100%

80%

60%

40%

20%

0%

2015

All Firms Top 20 Firms

2016 20162015

More than 10

6 - 10

4 - 5

1 -3

None


Firms that are considering a merger/acquisition have stated that their primary reasons for considering such a transaction are to increase their scale of operations (65%) and to provide a more diversified range of services (42%).

Impact of Brexit

Most firms surveyed (87%) expect more UK firms to open offices in Dublin as a result of Brexit. Most firms (80%) also anticipate an increase in mergers/acquisitions by UK law firms in Ireland as a result of Brexit.

This may result in opportunities for local firms to merge or be acquired or have stronger links with these firms. UK law firms especially those specialising in the financial services and intellectual property areas have already been evident in the marketplace. Pinsents have stated publicly that they are in the preliminary stages of examining suitable options for them in Ireland as they already have a presence in the Northern Ireland marketplace having joined up with a local firm there.

UK law firms that set up greenfield offices in Dublin post-Brexit will be seeking to recruit talented partners/teams and it is inevitable that more lateral hires will result.

Expectations on levels of merger activity

Has your firm been approached for a potential merger in the last two years

2015 2016 Top 20-2015 Top 20-2016

Yes 37% 40% 67% 69%

No 63% 60% 33% 31%

2015 2016 Top 20-2015 Top 20-2016

Increase 58% 59% 73% 62%

Remain the same 32% 35% 27% 31%

Decrease 2% 1% 0% 0

Refused/Don’t know (DNRO) 8% 5% 0% 7%

Limited Liability Partnerships

The partnership business model has long been stated by law firms to restrict a firm’s ability to merge with or acquire other law firms. The New Legal Services Regulation Act allowed for the introduction of Limited Liability Partnerships (LLPs). LLPs will require authorisation and registration through the new Legal Services Authority. Our survey results show that 62% of firms (69% of Top 20 firms) are contemplating adopting this business model and of those two in three in the shorter term.

It is our view that the introduction of LLPs will increase the merger and acquisition activity in the sector over time. This is evidenced by the fact that there is more merger and acquisition activity prevalent in the UK market where the LLP business model is the most widely used business structure for law firms and has been available as a model for professional practices for many years.

25

IT investment cyber security and social media


Investment in ITThe legal sector in 2016 is increasing spend on IT, clearly recognising that with growth and the pressure to achieve efficiencies in processes comes the need for investment in Information Technology systems. It’s not surprising that IT spend has increased as most firms have stated that the use of technology to manage the firm and the use of technology to interact with clients will have a significant impact on the profession or their firm over the next five years.

Over 50% of firms think investing in technology is a major opportunity in terms of improving performance over the medium term. Firms report a sharp increase in overall spending on IT up from 4.9% as a percentage of turnover in 2015 to 5.6% in 2016.

Larger firms remain focused on this strategic issue with 38% of the top 20 firms reporting they have completed updating their systems over the last 12 months and a further 24% reporting such investment as an immediate priority and the remainder as a medium term priority.

Overall, the application of technology has vastly improved in law firms, but this has also created hazards and vulnerabilities. High profile breaches of networks and systems and targeted hacks have increased and caught the attention of the public, media and regulators. Ensuring IT systems are secure, data is safe and staff are properly trained in IT risks and processes is key for all firms.

IT Investment, Cyber Security and Social Media

Legal firms are clearly investing in IT with 40% of firms completing significant IT investments over the last 12 months. Most firms are signalling that IT investment remains an immediate or medium term priority.

Upgrading of IT systems

Investment in Technology to improve efficiencies in processes in firms and interaction with clients is seen by many firms as a key opportunity to progress in the marketplace.

Marc Lowry

A medium term priority

Not a priority

An immediate priority

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%2014 2015 2016 Top 20

Done in last 12 Months

A long term priority

27


An issue of real importanceCyber security has become one of the principal concerns for business and professional practices with seminars, articles and media coverage on a regular basis, covering everything from legal liability to public relations. Aside from upskilling and raising awareness within firms, the practical consequences need to be considered in the context of a firm’s ability to recover from attack and how it responds to disruption.

Firms need to be cognisant of the risks to their firm from lax security protocols or untrained staff as well as how to mitigate the impact of an attack. Analysis of risk requires a review of matters like outsourcing and contractors as well as evaluating the benefits of a cyber-insurance policy.

Increasing investment by smaller firmsMore than one in three small/medium firms have invested in upgrading their IT systems in the last 12 months. 41% of the remainder rate such investment as an immediate or medium term priority. IT still remains a lower priority for some firms however, with 18% not prioritising it at all.

Cyber securityInformation security is a key issue for and threat to the reputation of a law firm. Our survey reveals that cyber attacks on legal firms are up almost 50% year on year rising from 20% reporting attacks in 2015 to 29% in 2016. For the Top 20 firms 38% report they have been subject to such attacks.

Cybercrime is on the rise and is one of the biggest emerging threats facing the legal profession today. British PI insurer QBE has reported that c.£85 million was stolen from client accounts in the previous 18 months in the UK.

Cyber attacks reported up almost 50% in last 12 months.

29% Firms have been subject to a cyber attack in the last 12 months

38% Top 20 firms subject to cyber attack in the last 12 months

52% Security breach caused by malware

35% Security breach caused by ransomware


Reality bites!In 2012, Robert Mueller, Director of the Federal Bureau of Investigation said, “I am convinced that there are only two types of companies: those that have been hacked and those that will be. And even they are converging into one category: companies that have been hacked and will be hacked again.”

Law firms present a particularly attractive target for cyber criminals. Firms hold sensitive and potentially valuable data about individuals and corporates and may have significant client account balances on hand. Losing client data/funds or having sensitive and confidential information exposed may be the most frightening outcome for a law firm resulting from a cyber attack.

Earlier this year it was reported that law firms were the targets of espionage by hackers who tried to obtain merger and acquisition details in order to facilitate insider trading. Firms acting in this area are likely to remain at risk from both cybercriminals and nation state attacks.

Many high profile corporate disasters due to IT security breaches have been reported in the press over the last 12 months. Target, one of the largest retail chains in the US, suffered a hack that saw millions of customers’ credit card and personal details stolen and had an immediate impact on consumer confidence and threatened the very survival of the business. The failure of the organisation to respond effectively and speedily from a systems and customer service perspective, coupled with an ill-conceived public relations response, undoubtedly contributed to the $162 million cost borne by the company which ultimately led to the departure of their CEO.

The Information Commissioner’s Office in the UK (ICO) imposed a record £400,000 fine on telecoms company TalkTalk, stating the cyber breach “could have been prevented if TalkTalk had taken basic steps to protect customers’ information.”

Irish legal firms on top of the problemIt is essential to be prepared and have systems, practices, policies and procedures in placethat ensure you and your firm have mitigated and managed the risks.

No firm is immune from cyber attack and all systems are vulnerable, particularly when the human element is factored in. Our survey revealed that 89% of respondent firms have established processes to address computer security breaches. 80% of firms (92% of the top 20) currently conduct security assessments, annually or bi-annually.

Security risks are internal as well as external and your people are a potential weak link. Deliberate actions by a disgruntled employee or an innocent response to a phishing email could expose you and your firm. Not only are attacks on the increase but almost four in 10 of the firms who were subject to attack report that they suffered down time as a result. This has a real cost. Vigilance and staff training form part of a robust security framework. The majority of attacks reported in our survey come from malware (52%) and ransomware (32%).

29


Many firms outsource their IT function and security. Firms need to ensure they have a reliable and knowledgeable IT partner looking after their data.

Can you respond adequately to a breach? 9% of firms subject to attack tell us that the impact of a cyber attack was significant to their firm. How a firm responds to an attack is critical.

Impact of cyber attack

Top 20 firms have invested in cyber security to the extent that even though they are more likely to be subject to cyber attack, they have stated that these reported incidences have to date had little or no impact on their operations.

Type of Cyber attack? Our survey reveals the following:

Malware (i.e computer virus)

Ransomware

Emails

Phising

Hacked into Webpage

Other (please specify)

45%

40%

35%

30%

25%

20%

15%

10%

5%

0% Very significant

Fairly significant

Moderateimpact

Little Impact No Impact


Our viewCybercrime is a clear and present threat to legal practices in Ireland. Attacks will occur more frequently, and at an increasing rate. Firms need to plan for both mitigation and response as

the threat grows, in likelihood and severity.

Social Media Most firms reported that marketing and brand development will be important to the growth of their firm over the next five years. The question is will the sector grasp the business development opportunities that social media can yield?

A game of catch upThe legal sector has treated social media, generally, as something for others. This outlook needs to be rethought as the audience and engagement on social media grows. There are more than three billion internet users, two thirds of them having social media accounts and recent data shows that 64% of Irish people have a Facebook account. Mobile is an increasingly important platform and the number of smartphone users globally is expected to surpass five billion by 2019. Social media outlets are now marketing giants, offering businesses a platform for low or no cost access to potential customers.

For social media users in the profession the primary motivation is business development and marketing with survey respondents indicating they primarily use it to generate new clients (30%) and as a marketing tool (48%). These tools have yet to cut through from a recruitment perspective with only 5% of respondents indicating they use social media for this purpose.

ViewpointWe expect to see more investment in technology by Law Firms to improve efficiency, profitability and interactions with clients. New technologies continue to disrupt and fuel the need for firms to invest and innovate. More firms will establish and/or improve their digital strategies and invest accordingly to differentiate themselves in the market place.

Concerns remainMany law firms have had concerns about the digital world. However, these attitudes are rapidly changing with only 19% of respondents reporting in 2016 that social media is not a suitable communication channel for the profession a stark contrast to the 48% of respondents who felt that way in 2014. Adoption of the tools has yet to take a more significant foothold but there are rays of light with use of Twitter and Facebook rising rapidly. It is notable that 24% of firms overall, report having no social media presence while 100% of large firms have a presence, and in many cases use multiple sites.

The overall figures for social media usage show increases in usage for Twitter at 26% (up from 16% in 2015) and Facebook at 22% (up from 11%) but a stagnation in LinkedIn adoption at 50%, similar to the previous two years’ results.

More than one in two firms have a formal policy for staff and partners commenting on social media about the firm, partners and staff members. All of the top 20 firms surveyed have such policies. One in three firms (two in three of the top 20 firms) monitor comments on social media about the firm, their partners and staff.

31

Smith & WilliamsonSmith & Williamson32

Brexit: opportunity or threat?

Smith & Williamson

Brexit: opportunity or threat?Brexit is anticipated by Irish Law firms to result in more competition with more UK law firms expected to open offices in Dublin and seeking merger and acquisition opportunities with Irish firms and lateral hires from them. Most firms suggest that Brexit will have a significant impact on the legal sector in the longer term.

The UK electorate voted to exit the EU on 23rd of June 2016. It seems that there was little if any planning done by the UK Government for such a result. The Prime Minister David Cameron resigned and the Labour Party is in turmoil. The new Prime Minister Theresa May has now set up a Brexit department to review and plan for Brexit prior to triggering Article 50(2). She has been quite clear in stating that the will of the people will be carried out and there will be a Brexit. She has recently stated that Article 50(2) will be triggered by 31st March 2017. The recent High Court Ruling could impact on this date.

Among all the noise about Brexit, here are some of the facts:

• We will not know the terms of the exit for some time which makes it difficult to have concrete views on what the impact will be on individuals and businesses in Ireland. A significant unknown is the trading relationships that the UK will have with the EU and the rest of the world post Brexit.

• It has however created a period of uncertainty. The uncertainty will have a cost in the form of less investment and slower growth until we have more clarity on what will happen and when it will happen.

• Brexit will have an impact on the Irish economy the scale of which will depend on whether there is a hard or soft Brexit. The ESRI have calculated that for every 1% drop in GDP in Britain 0.3% is shaved off the Irish economy. The Department of Finance has suggested that the estimated cost between 2017 and 2018 of Brexit will be circa €3 billion.

• Currency fluctuations are posing immediate challenges with a weakening sterling making Irish exports to the UK less competitive. Exporters to the UK are already seeing intense pressure on margins and pricing strategies as a result. Cheaper UK imports and cheaper prices across the border in Northern Ireland will impact on the domestic economy especially on the retail sector.

• The UK is the EU’s biggest recipient of foreign investment and if even a fraction of its foreign investment businesses were to be attracted to Ireland it could have a big positive impact on the Irish economy.

• There are no guarantees that trade without tariffs or border checks will continue.

• Post Brexit, Ireland will have lost an important ally at the negotiation table in particular regarding the desire in the EU for more tax harmonisation in the EU.

• The EU has its own issues also at the moment not just Brexit. The outcome of elections in Germany and France in June 2017 will have an impact on the Brexit negotiations and the EU stance in relation to same. The movement and immigration of millions of refugees from Africa and the Middle East, the threat of terrorism, the fallout from the financial crisis and the anti-European sentiment that has been growing in EU member states including the growth of parties to the far right have also created issues for the EU.

Brexit will have asignificant impact onthe legal sector overthe next five years.

Paul Wyse



Almost half of the firms surveyed (44%) and 62% of the top 20 firms think that the legal sector in Ireland overall will be impacted negatively by Brexit and are therefore concerned for the Irish economy and the uncertainty caused by Brexit. One in three firms surveyed however think that Brexit will have a positive impact on the legal sector in Ireland. All of the top 20 firms have stated that they think Brexit will have a significant impact on the legal sector in the longer term.

Brexit is a seen on a glass half-empty, glass half-full basis by legal firms as some perceive potential opportunities and others see threats. When asked about the impact on their own firm, respondents suggested that they anticipate less impact with one in three believing Brexit will have a negative impact on their firm, 20% thinking it will have a positive impact (39% of top 20 firms) and 44% believing it will have no impact (15% of the top 20 firms). Surprisingly most firms outside Dublin expect no impact from Brexit on their firm.

Ireland has the most similar legal jurisdiction to the UK of all the EU states and is the only English speaking common law jurisdiction also with similar legal institutions. A number of UK firms are already reviewing their options about opening an office in Dublin and whether to merge with an existing Irish firm. Pinsents have already commented publicly on this.

The prospect of increased competition is underlined by our survey with 87% of respondents expecting more UK law firms to open offices in Dublin. More than 80% of the law firms surveyed anticipate an increase in Mergers/Acquisitions by UK law firms in Ireland post Brexit.

The Law Society has reported that a record number (472) of solicitors from England and Wales have applied for registration and been admitted to practice in Ireland so far in 2016. With the potential influx of new firms and our survey finding that firms are still increasing or maintaining their intake of Graduate recruits (48% of all firms and 92% of Top 20 Firms) we believe the employment market could heat up dramatically. This will lead to an intensified battle for talent and make recruitment and retention of staff and partners a key challenge for many firms especially in Dublin.

Insights from our survey

Impact of Brexit on your firm

60%

50%

40%

30%

20%

10%

0%Dublin Ex Dublin Top 20

No Impact

Negative Impact

Positive Impact

“We are in unchartered territory, and whenyou are in unchartered territory witheffectively a blank sheet of paper in front of you then you have an opportunity to tryto think things that might previously have been unthinkable and shape the future.”

Nicola Sturgeon, First Minister of Scotland

Smith & Williamson

Existing and new Business – short term and long term impactsIn terms of new business, respondent firms specifically identified a neutral impact in the short term with Top 20 firms seeing continuing opportunity for acquisition of new customers. There is heightened concern about levels of new business in the longer term with 34% of all firms and 46% of the Top 20 believing that Brexit will have a dampening effect.

Law firms exposed to different sectors will see clients impacted in different ways and to different scales whether it be agri/food, retail, construction/property, motor, leisure or financial services to name a few. Somewhat surprisingly most firms surveyed (58%) do not however expect their existing client base to be impacted by Brexit.

Our ViewBritain has been a member of the EU for over 40 years, not all harmonious ones, and unwinding this relationship will be very difficult. Markets will inevitably react to leaks and news about negotiations throughout the process. Longer term impacts of the decision to exit from the EU will depend on the relationship the UK seeks with the EU in the future and the position adopted by the EU in relation to this. While it is expected that there will be at least a two year transition window for new trading agreements and possibly longer there is an immediate need for law firms to carry out a Brexit impact assessment on their services and their client base.

Short term impact

All Firms Top 20

Negative

No Impact

Positive

70%

60%

50%

40%

30%

20%

10%

0%

Long term impact

50%

45%

40%

35%

30%

25%

20%

15%

10%

5%

0%

Negative

No Impact

Positive

All Firms Top 20



Brexit from a UK perspective The aftershockIt is fair to say that most people in the UK and particularly those in business spent the majority of 24 June 2016 in a complete state of shock. Much has been written about the negative campaigns surrounding the EU Referendum and the political crisis that subsequently engulfed all of the UK political parties, but however history judges this time, what is now abundantly clear is that ‘Brexit means Brexit’ and the UK is really going to leave the European Union.

UK economyThe UK economy was already showing signs of decline in the first half of 2016 and while the referendum created a temporary hiatus on business decision making, the expectation was that with a remain vote the UK economy was likely to decline further in the second half of the year. If the vote was to leave, then the predictions were much more dire, in terms of emergency budgets, tax rises and other severe consequences.

Short termOf course, at least in the short term, the economic outcome has been relatively positive. Economic data has proved to be fairly resilient and UK GDP growth for the third quarter exceeded expectations at 0.5%. The dramatic fall in sterling post the referendum appears to have boosted the tourist trade as well as exporters and calming words and actions by the Bank of England appear to have contributed to a more stable environment than some predicted. The trusty UK consumer has also continued to spend at perhaps surprising levels, although whether that it is due to confidence in the future or panic that the good times are about to end is unclear!

Long termHowever, in the longer term the decision to exit the European Union will have far reaching implications on the UK economy, immigration policy, and the accessibility of UK and EU markets to each other and the impact of EU regulations on the UK going forward. The UK can take back control of its incentive policies to local and overseas businesses and agriculture in a bid to attract foreign direct investment and boost the UK economy.

Once the UK arrives and is settled in its post-Brexit world, businesses will find themselves in a much more certain environment in which to make decisions. However, the exit itself will not take place until what is expected to be March 2019 and it is likely to be some time after that that various agreements and structures have been put in place to deal with the crucial issues affecting businesses such as immigration and tariffs.

Where to next?Of course, businesses can’t just wait for this certainty to arrive and they need to make decisions now. If they have access to government and can obtain some assurances (e.g. Nissan) then they are fortunate, as the vast majority of businesses in the UK will have to make decisions without ministerial input.

In light of this we are seeing a number of businesses, particularly in the service sector, who have traditionally provided services to EU countries, look to establish themselves with an overseas office in an EU country. France and Germany are obvious destinations, but given the proximity, language and similarity of legal system, Ireland and Dublin in particular are seen as attractive locations for businesses wanting an EU presence post the UK’s exit.

Most UK Law Firms stated Brexit would have a negative impact on their firm.

Giles Murphy

Smith & Williamson

Our UK surveyOur UK law firm survey, this year, which was carried out before the Brexit referendum highlighted the concern of Law firms surveyed with 79% stating Brexit would result in a negative impact for their firm if the UK left the EU. The potential negative impact of Brexit on levels of new business in the short term and on firms’ existing client base were the most significant factors highlighted (68% of firms).

In terms of the specific impact of the Referendum on UK law firms, there were a number that came out relatively quickly after the vote to say they were reducing headcount, deferring pay rises and also partner distributions. Most onlooker’s views were that Brexit was a convenient excuse under which to hide some more fundamental problems, as the majority of firms have not been too badly impacted in the several months following the announcement of the result. That said, whether it is a more challenging economic environment, lack of transactions and activity in the market or general uncertainty, evidence suggests that a number of UK law firms are trading at last year’s level or achieving minimal growth. While that may not be a disaster, it comes against a backdrop of rising costs and much uncertainty as to the road ahead.

ViewpointThere will almost certainly be a degree of inertia as people and businesses hold back from making key decisions as they await more clarity in the shorter term. With the fortunes of lawfirms so intrinsically linked to those of UK plcs - as so clearly demonstrated by our surveys over the last 20 years, confidence could remain markedly dampened for quite some time to come.


Leadership and succession planning


Leadership and succession planning

Most law firms do not have formal succession plans.

Gordon Hayden

Having a succession plan is essential to the survival of any organisation. Yet we continue to be surprised that so many businesses put succession planning on the back burner. Many recognise the importance of succession planning but fall down in formulating and implementing a formal succession plan. Legal firms are no different in this. Almost 90% of law firms have less than five solicitors and 42% of law firms are sole practitioners. Succession options can therefore be quite limited which is why it is important to plan your exit strategy.

Only 8% of law firms surveyed operate a formal succession planning process for managing partner (23% of Top 20 Firms)

Most law firms do not have formal succession plans. They adopt a wait and see approach hoping that in the fullness of time the transition to the next generation will seamlessly work out. They often believe that remuneration models alone will dictate who ultimately succeeds in running the business. This can be a dangerous strategy that can backfire in terms of lawyer and client retention and indeed the viability of the business going forward. A strong leadership candidate is not always the most successful new business winner or fee generator.

For smaller firms there may be no plan. However it is critical that these “owner managers” seek to understand and plan their exit strategies. Sale or handover of the practice can be problematic unless there is time for systematic and smooth transition of important client relationships.

82% of firms surveyed have informal or no processes for entry to partner level. The lack of formal succession planning in firms can lead to a lot of uncertainty and may result in talented individuals with partnership potential leaving firms.

The introduction of new partners to clients takes time and requires sensitive management. Coaching and mentoring of new partners is vital. Later partner retirements, a consequence of the recent recession, combined with insufficient pension funds or planning now need to be met head on. Firms should plan for key roles that are likely to be vacated, identify who will fill them and if necessary start the recruitment process well in advance. Part of the planning process should involve ensuring partner buy-in to what those future needs will be.

Succession and promotion strategies employed by firms

Formal

All Firms Top 20 Firms

FormalInformal Informal

100%

80%

60%

40%

20%

0%

Entry to Partner Level

Identifying future senior or managing partners

39


Retirement PlanningOur survey suggests that the vast majority of firms are still leaving it up to the individual partners to seek out and pay for financial planning advice, running the risk that partners will do nothing or fail to plan for retirement early enough. Many partners have suffered a significant decline in their pension pots as a result of the recession and have affordability issues around retirement.

60% of law firms (85% of top 20) surveyed say it is the individual partners responsibility to get retirement and pension planning advice at their own expense.

The key is educating partners on the options available to them, otherwise they may find themselves unprepared and likely to seek to work for longer than they had originally planned, leaving firms with an ageing partner group and client base. This has implications for the ability of firms to offer the next generation the career progression they are looking for and may lead to the loss of future leaders if not addressed.

Leadership RolesThe identification and nurturing of leadership talent goes hand in hand with succession planning. Leading a professional services firm requires a very different approach and skillset to providing a professional service. It is unfair to ask a candidate who has completely focussed on client work for his/her entire career to take on a leadership role without any training or involvement in management roles in the firm yet this often happens.

It is very easy for a partner to be immersed in the operation of his/her own department. If that person then assumes a senior management role he/she comes with only one perspective of the firm. The candidate may have no understanding or empathy with other parts of the organisation. Identifying and nurturing the next generation of leaders must therefore be a cornerstone of mentoring and training programmes for firms.

Percentage of turnover spent on professional development and training

The average spend of law firms surveyed on professional training and development equates to 2.8% of turnover (2.3% in Top 20 firms). This has increased as profitability has improved and staff numbers have increased.

2014 2015 2016 Top 20

2.2% 2.1% 2.8% 2.3%

63% 60% 33% 31%


ConclusionThe stakes are very high when planning for succession in your firm/business. Planning for succession enables a smooth transition from current leadership to future leadership. It is therefore important to set strategic goals and have clearly defined plans and strategies to achieve them.

Clear communication about succession plans reduces uncertainty for staff, management and business owners. Competition for quality leaders is intense. It is therefore important to attract, develop and retain your best talent and future leaders. This is increasingly so given the war for talent is intensifying.

The goal of any good succession plan is to get the right person in place for tomorrow’s job.

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Dublin professional practices team

Paul WyseTel: 01 6142504Email: [email protected]

Dan HollandTel: 01 6142511Email: [email protected]

Áine ReidyTel: 01 6142573Email: [email protected]

Seán McNamaraTel: 01 6142621Email: [email protected]

Gordon HaydenTel: 01 6142592Email: [email protected]

Liam Dowdall Tel: 01 6142528Email: [email protected]

Marc LowryTel: 01 6142546Email: [email protected]

Frank Brennan Tel: 01 5006528Email: [email protected]

Derek Ryan Tel: 01 5006527Email: [email protected]

Liz CahillTel: 01 6142525Email: [email protected]

Cedric Cruess CallaghanTel: 01 5006523Email: [email protected]



Our approachEvery firm has different needs and our legal practice service team tailors its approach to your unique circumstances and requirements. We do this through a focused approach on your needs and the application of insight and benchmarks gained from our experience working with our extensive client portfolio of professional practice and legal firms.

Dedicated professional services teamWe have built a dedicated team centred on providing a quality service to our growing list of legal firm clients. Based in Dublin, we seek to deliver tailored services focused on your individual firm’s needs. Our suite of services encompasses the following.

• Mergers and acquisitions• Bank finance/refinancing • Succession planning• Preparation of legal firm annual accounts• Independent accountants report for Law Society/Regulator• Outsourced accounting services – bookkeeping• Finance management consultancy• Profitability analysis• Practice financial policies, controls and procedures• Lock-up• Growth

Delivering growth and profitability in the legal sector

Managing your practice effectively

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Paramount CourtCorrig RoadSandyford Business ParkDublin 18 D18 R9C7

T: +353 1 614 2500F: +353 1 614 2501

12 Herbert StreetDublin 2D02 X240

T: +353 1 500 6500F: +353 1 500 6501

Smith & Williamson is a member of Nexia International, a worldwide network of independent accounting and consulting firms.

survey of irish law firms - smith & williamson...survey of irish law firms 2016201 actions taken...

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