Bellwether 2022

Transformation troubles: responding to a new era of change

The post-lockdown boom has restored business confidence for small law firms. Many have seen their financial expectations met and have devised ambitious growth plans, with mergers and acquisitions becoming increasingly attractive.

But a new wave of change is on its way and small law firms will need to move quickly in order to stay afloat. Can small law leaders apply what they've learnt in the last 24 months to a new era of transformation? Or will an out-of-the-woods attitude hold them back?

In the tenth edition of the LexisNexis Bellwether report, we explore the triumphs and challenges facing small law firms and solo practitioners.

10 years of Bellwether and the future is looking…uncertain

For ten years now LexisNexis has been producing its Bellwether report - an annual survey of independent law firms throughout England and Wales - and we’ve been overwhelmed with the positive feedback we have received from the legal community.

Throughout the last decade these reports have offered much-needed insights into the small law sector and contributed to the discourse on the future of independent law firms - the 2022 edition of Bellwether is no different.

This year we followed up with 345 small law and solo legal professionals after the post-pandemic boom saw business confidence soar. Now, it seems small law has a new set of challenges, triumphs and opportunities to speak of (and some old ones, too).

Despite threats of doom and gloom, law firms of all sizes were pleasantly surprised to find the financial repercussions of the pandemic were minimal – with many making a serious profit.

In fact, the pandemic acted as a confidence booster for most, forcing them to enact new systems, processes and ways of working that had been on the agenda for a while – and, of course, realising that these changes were not only achievable, but beneficial for business. The downside was that everyone else went through the same evolutionary journey and came out better off. As a result, the competition couldn’t be fiercer – a recent report from stockbroker Arden predicted that, of the 10,000 law firms across the UK, approximately a third will close their doors or merge in the near future.

In this year’s survey we can see a growing awareness that, despite the many obstacles countered in recent years, it will not be smooth sailing for the small law sector from here on out.

Keeping up to date with new technology, changes to the law, and compliance measures were some of the biggest threats - as was attracting and retaining the right talent.

However, if the legal sector has taught us anything since the pandemic began, it is that resilience holds a fundamental place inside many a small law firm.

State-of-the-small law firm

Business confidence levels, financial expectations and growth plans

Business confidence returns to pre-pandemic levels

After a serious low and a soaring high, business confidence levels have returned to pre-pandemic levels. Results from our 2022 Bellwether survey revealed 91% of respondents are quite confident or very confident about the future of their firms (a 2% decrease from last year). A lazy conclusion to this change would be that confidence is slipping, but it is more likely the aftermath of the post-lockdown legal boom which saw the UK’s law firms generate a whopping £41.58bn in revenues, compared to annual turnovers of £36.78bn in 2020.

“We’re predicting higher revenues than expected – that's just a part of the way the business has grown during the pandemic and we are getting more work than we can service so that gives us confidence investing in new fee earners.”

Four-fifths of firms say financial expectations have been met

A third of respondents said the impact the pandemic has had on 2021 financial predictions was somewhat higher (23%) or significantly higher (10%) than projected. Just under half (49%) of respondents said their financial predictions were about level with what they expected. Only 17% said it was smaller or significantly smaller.

“Revenues have exceeded expectations actually. That’s about good work – good work coming in. We reviewed our charge rates and that has helped.  We did some work on pricing with a consultant and that helped, too."

More than half of small law firms are in growth mode

When asked about the performance of their practice compared to three to four years earlier, just over half (51%) of respondents said they are growing. This is a noticeable slip from the two-thirds (66%) of respondents who said the same thing in 2021, hinting that the post-lockdown boom that came to define 2020 and 2021 has come to an end.

“I think for a lot of people, they are trying to consolidate and deal with the work they’ve got. We want to move past that because if you are constantly worrying about that you’re never really going to grow. You’re trying to deal with standing still, which doesn’t appeal to us."

More firms are open to mergers and acqusitions

Organic growth is the priority for most small law firms, with 65% of respondents revealing that their businesses are planning to grow through organic means in the next five years or so. This is a small slip from the 66% we saw in 2021.

When asked about growth through mergers and acquisitions, 16% said this was part of their current growth strategy. In addition, when asked how the pandemic has altered their views on merging or acquiring other firms, a fifth (21%) said it has made it more attractive, compared to only 14% in 2021.

This aligns with what we’re seeing at larger law firms, where growing through mergers and acquisitions is on the agenda for most. A recent HSBC survey of larger firms found 92% are planning to grow on a national or international scale through the acquisition route. A similar survey by M&A broker, Acquira, found almost half (47%) of UK law firms are considering mergers and acquisitions.

"At the moment we are looking at organic growth because we’ve got opportunities running throughout the practice, but also there is an intention to increase our geographical footprint.”

“We probably don’t have the funds to acquire another firm so we’re better expanding through recruitment – and then you get to a certain level and you’ve got to think, well, are we happy as we are? Is the organic growth working?"

"Unless it is a merger or acquisition with somebody that you know exceptionally well and you are very, very confident in their risk appetite being the same as yours and their history, it is quite a big risk.”

Facing up to the future

The biggest challenges small law firms are up against

Change management is the biggest challenge for most

Just as the legal sector is showing signs of returning to its former self, the same old problems are popping up once again.  

Keeping working practices and systems up to date is the most significant threat to small law firms, with four-fifths of respondents (81%) listing it as a quite significant or very significant threat.

Another commonly cited threat was the need to keep up to date with changes to the law (78%), as was the continuing demands of compliance regulations (77%), and the need to attract and retain good lawyers (77%).

The top three threats facing small law firms

However, when asked to list the top three threats that represent their firms’ biggest challenges, attracting and retaining talent came up first, with 49%. The pandemic forced many to rethink their current working situations, prompting what the media has dubbed the "Great Resignation". This is especially the case for those working in the legal sector, who saw their friends, family and flatmates who work outside of the legal sector enjoying a much better work-life balance.

The second most-commonly cited challenge was attracting new business at 48%, followed by the continuing demands of compliance regulations at 41%. The latter won't come as a shock to most. While insurance costs are rising - a significant threat in and of itself - simply trying to reduce internal risks and keeping up with compliance changes has become a heavy burden for many.

Salaries and insurance are the biggest overheads

Salaries (56%) and Professional Indemnity Insurance (43%) have been the most significant operational costs for small law firms in the last 12 months, while technology spend is also high at 34%.

When looking at law firm size, there were big differences in the top five challenges: compliance is a bigger burden on small firms with lower capacity, as is being able to retire when you'd planned to.

Professional Indemnity Insurance (PII) costs have accelerated in recent years, with the pandemic only escalating the problem by adding a number of cyber-security risks to the equation. When asked if PII costs had increased at the 2021 renewal point, 45% agreed, 10% disagreed and 44% said they didn’t know. However, when excluding those who aren’t aware of any change – presumably because this falls outside of their day-to-day – this figure climbs to 81%.

Very few (6%) said their law firms have tried to counter this problem by jumping ship to a different provider. Instead, law firms are attempting to lower PII costs by starting the renewal process earlier or making internal changes such as improving risk management.

“Switching providers can have its merits if you’re saving on the premium but at the same time we trust our PII broker, which allows us to deal with things more proactively when we have an issue.”

“Switching providers doesn’t necessarily help. We tried, we shopped around a little bit, but if you go to an insurance company and they know you’re up against it, they know that you have to have it. It’s not like it’s an option.”

The results of our Bellwether 2022 survey point to three key threats small law firms will face in the coming months.

Threat one

Keeping up-to-date with processes and technology

Small law firms are thinking big when it comes to tech

When asked which change initiatives law firms have implemented recently or plan to implement in 2022, website development was the most popular choice. A third (33%) of respondents saying they have already invested in website development while an additional 30% said they plan to invest. In a similar vein, process and technology was another commonly cited area of investment. The most commonly cited initiative law firms plan to implement is to develop a social media strategy, with a third (33%) stating this to be the case.

Employing more lawyers was also high on the agenda, with almost two-thirds saying they have or plan to invest in more legal experts. However, investing in increased specialisation and employing additional staff to develop marketing or business development was low on the priority list.

“For us it would revolve around automation technology – a lot of it is a case of adapting the technology to your business – it’s already there, it’s ready and waiting.”

The tech tools small law firms are turning to

When asked which tech tools are currently in place, perhaps unsurprisingly, teleconferencing had the highest adoption rate at 79%. This was followed by legal research tools at 69%.

Productivity and collaboration tools such as Microsoft Teams are also widely used, as is cloud file sharing software.

Only 6% said they are using advanced legal technology such as AI robots, while an additional 5% said they are using chatbots.

Interestingly, a quarter of respondents said they already have online portals for matter status updates and a further 11% said they are planning on introducing it in the next 24 months.

“The tech has worked fine for us all the way through the hybrid working paradigm. We are very lucky we did an upgrade right at the beginning and the tech has been fantastic for us."

The tech tools small law firms want the most

Legal research tools, CRM systems and e-verification signatures are the most commonly sought-after tech tools that small law firms plan to implement, at 19%, 18% and 17% respectively.

However, almost half (47%) said they had no plans to implement any of the technology suggested in the survey. When asked what’s stopping them, lack of time was listed as the biggest reason (52%), followed by lack of technical expertise (46%), lack of understanding (36%) and insufficient budget (35%).

Lawyers are turning to free legal research tools despite lack of trust

Legal research was listed as the second most widely adopted tech tool by small law firms, with almost two-thirds saying they’ve already invested in legal research tools. However, the survey revealed a shocking number of respondents at small law firms are still using free legal research sources instead of paid platforms.

Three quarters (74%) of respondents said they use Google for research and guidance information, 64% said the Law Society, and 58% said Legislation.gov.uk. Over a half (52%) use LexisNexis and over a third (38%) use Thomson Reuters.

The survey also highlighted a growing awareness of the downsides associated with free legal sources. Two-thirds (63%) agreed that it is riskier to use open sources than paid sources compared to 46% in 2021, and the same number (63%) agreed it takes longer to complete a research task using free sources versus paid sources – 45% said the same in 2021.

This indicates that lawyers at small law firms prefer using paid platforms for legal research and are aware of their benefits, but may not have access to the content they need. This could be because many firms buy practice-area specific packages, but when lawyers need content that falls outside that practice area, they turn to free alternatives, thus increasing their risk to mistakes and wasting time.

"We use the paid-for services. That’s because of risk. There’s a lot of effort put into these platforms to make sure the information is correct and up-to-date. Some areas change constantly and the lawyers need to have that information at their fingertips."

I suspect it might be a generational thing there are so many people who have grown up just googling everything now.”

Threat two

Attracting and retaining talent

The war continues for legal talent

In a question covered earlier in the report, we revealed two-thirds of respondents said their law firms have invested or plan to invest in more lawyers.

We also asked legal experts how confident they are about competing for talent over the next 24 months. Half (53%) said they are only somewhat confident. Just under a third (31%) said they are very confident or extremely confident. A further 18% expressed doubts about finding the right lawyers.

“People want so much money at the moment, which I understand – if that’s the industry, that’s the industry. It seems to have rocketed up and firms are throwing money at people to keep them."

“The problem that we’re seeing and I think that most firms like us are seeing locally and nationally is a lack of people in that sort of two to five to ten year qualified bracket. We’re good at training our own people, but then we get bigger firms coming in and swooping on your well-trained people offering them considerably more money and whisking them away."

Most say they’re happy – but are they being honest with themselves?

The majority of respondents ranked their job satisfaction levels highly, balancing out to an average of seven out of 10. In fact, three-quarters of respondents ranked their roles as six or above.

“I would agree that I enjoy my work, and I would go back into law if I had another chance, but maybe I haven’t been burned as much as some of my colleagues."

Stress levels, however, were also high, with the overall average resting at six out of 10. Three quarters (75%) said stress levels are between six and 10, while 44% said between eight and 10.

"There are some fabulous younger people coming through and a lot of them have new skills as well, which are helping older people in firms embrace technology and helping firms grow."

Work-life balance the most important aspect of a new role

When asked what they’d look for in a new role, work-life balance was ranked as the most important factor, followed closely by firm reputation. Client portfolios, leadership teams and access to legal technology were also deemed highly important.

Interestingly, only 1% of respondents ranked diversity and inclusion as the most important factor, and only 2% ranked climate change.

“I think probably the reputation and work/life balance you could see as being a main driver for switching a job offering credibility and reassurance.”

"When it comes to diversity and inclusion and climate change, I think with younger lawyers, they tend to be key issues. They do ask about these sort of categories."

Remote working isn't holding businesses back

When asked how working from home has impacted new business from passing trade, the majority of respondents (49%) said it has stayed the same. Only a small number (6%) said they’ve lost business because of this new way of working.

"We are very, very happy with the hybrid scenario, not because we have got any intention to decrease office space but just because our people are more productive and happy, and you know happy people are productive people."

Three quarters (71%) of respondents also revealed that their law firm has adapted well or very well to the challenges of hybrid working – only 3% said they had responded poorly or very poorly.

However, despite this progress, many small law firms still expect their team to come into the office on a full-time basis.

When asked how many days they are expected to work in the office, 43% of the respondents said five days a week while 19% said three days. Only 6% said they weren’t expected to go into the office at all. This appears unchanged from last year’s survey which saw 42% saying five days a week and 19% saying three days a week.

There are certain advantages to in-person interactions, such as learning and development opportunities, office culture and collaboration. However, with more and more lawyers wanting a better work-life balance, which for many means hybrid, remote and/or flexible working, the small law firms that fail to embrace a more flexible approach may find attracting and retaining the right people to become increasingly difficult.

“We want people to spend at least 50% of their contractual working time in the office, the main reason being to protect the culture of the firm because that’s built on relationships between people and that’s more difficult if people are working remotely.”

Lawyers want to spend less time on admin tasks

Nearly three-quarters (70%) of respondents said they spend between 20-50% of their time on admin work, while 12% said they spend more than 50% of their time on admin work.

The majority of lawyers would rather spend their time on more business critical tasks. Almost two-thirds (63%) said they would like to spend more of their working hours on client work and just under half (43%) said they would like to spend more time finding new clients.

Learning new skills or upskilling as a team was also in high demand, at 34%, while a quarter of respondents also expressed interest in doing more strategy and planning work.

Unsurprisingly, only 5% of respondents said they want to spend more time doing admin tasks.

Law firms that manage to adequately addressing this challenge, which is widespread across the legal sector, will not only be more efficient and profitable - they'll also create a better experience for their employees, increasing job satisfaction rates.

"I have a team that takes care of my administrative tasks, but I still spend around 25% of my time on these – it’d be great to cut that down if possible."

“The policy is, if you’re somebody who is in a higher position, where you can look after your own work, there’s more appetite for the business to allow those people to have the hybrid working."

Threat three

Driving new business and effectively managing clients