"Fears over the war for talent" rattles city law firms as legal market recovers

Third of Top 100 FDs now see threat of staff defection as high risk to profitability
Rise in corporate finance work now key to unlocking further growth in profits

London, UK, 8 April 2015 – The risk of key staff being poached by rival firms, potentially taking major clients with them, now poses a significant threat to the profitability of City law firms, reveals new research by Thomson Reuters Legal business, the world’s leading source of intelligent information for businesses and professionals.

According to Thomson Reuters’ 8th annual research among Finance Directors of the UK’s Top 100 law firms, a third (32%) now see poaching as a high risk to their firm’s profitability – up from just 4% who saw it as a key cause for concern in each of the last two years.

“As the legal market recovers and business picks up, the spectre of star lawyers or whole teams defecting to rivals – and a substantial portion of their client base going with them – is starting to stalk City firms once again. Team defections can also tend to lead to faster pay inflation for lawyers across the firms concerned.” says said Samantha Steer, head of Large Law Segment for Thomson Reuters UK Legal business.

“This has not really been an issue for most big law firms at all in recent years but now it’s a prospect which is clearly rattling many Top 100 Finance Directors, who are keen not just to preserve but improve their firms’ profitability as the economic outlook impro”ves.

“If key staff who have just sat tight and ridden out the rounds of redundancies and pay freezes as firms cut costs now decide the time is right to move on, taking their teams and their clients with them, it could seriously damage firms’ profits and reputation.”

Thomson Reuters adds that firms who want to retain key staff will have to consider very carefully how best to balance incentives such as increases in pay or bonuses or promotions against a cautious growth outlook and continued subdued fee levels.

Nine out of ten FDs see downward pressure on fees from clients as top risk to profits

The study also found that downward pressure on fees from clients is still seen as the biggest threat to profitability – and concerns are continuing to grow. Almost nine out of ten Top 100 Finance Directors (88%) see this as a high risk, up from 76% last year and 58% in 2012.

The prospect of work being taken in-house is also emerging as a critical concern – 32% now see this as high risk to profitability – compared to none last year or the year before.

“Firms are still seeing clients looking for ways to rein in their legal spending, and are expecting them to continue to negotiate hard on fee levels and even to look at doing more of their legal work internally,” says Samantha Steer.

“Overall, the mood among Finance Directors appears to be one of continuing caution. FDs are well aware that the nascent recovery remains fragile and that improving sentiment still carries risks, such as poaching, that must be negotiated carefully if firms are to reap the benefits.”
Commercial property and corporate finance expected to see fastest growth

Commercial property and corporate finance are the areas of legal work most widely expected to see rapid growth by Top 100 FDs.

42% said they expect commercial property to experience fast growth – up from none at all last year.

36% predict fast growth in corporate finance/M&A – up from zero last year and the year before. The same proportion expects to see fast growth in the energy sector (compared to 17% last year).
“Commercial property and corporate finance work were key areas before the recession but really suffered as deals dried up,” says Samantha Steer.

“Many FDs believe that recovery in these two critical areas will hold the key to delivering rapid growth.”

Projects and PFI work was the only area in which no FDs anticipate fast growth.

Public sector work was one of the few areas in which FDs expect to see a contraction, with 9% predicting work in this area will shrink over the coming year.
Table of survey results

Risks to law firm profitability
What do you think the most significant risks to the profitability of commercial law firms are?
Rate the following by their significance: High, medium or low risk.

2014

• High risk
• Medium risk
• Low risk

Continued weakness in corporate work

• 8%
• 76%
• 16%

Downward pressure on fees from clients

• 88%
• 12%
• 0%

Competition between law firms over fees

• 36%
• 56%
• 8%

Work being taken in-house

• 32%
• 60%
• 8%

Late payment by clients

• 20%
• 44%
• 36%

Clients consolidating their legal panels

• 32%
• 56%
• 12%

Disputes with clients over bills submitted

• 4%
• 36%
• 60%

Professional negligence claims

• 0%
• 32%
• 68%

Credit risk of clients

• 4%
• 32%
• 64%

Cost overruns on fixed fee work

• 36%
• 60%
• 4%

Competition from other legal services providers as a consequence of the Legal Services Act

• 8%
• 28%
• 64%

Guaranteed pay to lateral hires

• 0%
• 44%
• 56%

Poaching of staff by competitors

• 32%
• 52%
• 16%

Lack of capacity to meet increasing demand

• 8%
• 12%
• 80%

Cost of the law firm’s own property

• 4%
• 60%
• 36%

Changes to litigation funding

• 8%
• 40%
• 52%