As profit margins fall at U.K. law firms amid market challenges, that global digital transformation challenge is looming large. Artificial Intelligence, or AI, is on everyone's lips as an essential part of that transformation. Entrenched attitudes are holding people back however, and the legal sector is the latest one in the U.K. looking at the writing on the wall.
In 2016 75% of the Top 100 law firms in the U.K. reported revenue growth, down from 82% in 2015, according to PwC’s 25th annual Law Firms Survey, out today."Overall financial performance in the sector has been flat due to increased headcount and salary costs against a drop in chargeable hours and hourly rates. The top 50 firms have increased fee earner headcount by 7.6% on average and return on this investment is yet to yield significant revenue growth," it says.
Law firms increased their headcount as confidence returned to the sector last year, said David Snell, partner and leader of PwC’s Law Firms Advisory Group. "However, with the market turning out to be more challenging than expected and with increased competition from U.S. firms and new entrants, spare capacity is now an issue for firms. This situation is likely to be exacerbated following the EU Referendum vote in favor of Brexit. Profit per equity partner and rate per hour are under pressure in a sector where supply outweighs demand.”
U.K. law firms have been particularly successful in expanding on an international scale to meet client need, according to the PwC analysis. But "the challenge for U.K. top tier firms to match U.S. performance in terms of fee income and profit growth continues. While this growth has been flat for the U.K., rates of 2.9% and 3.2% respectively, have been reported for U.S. counterparts," it says.
One answer? Better use of technology - and Artificial Intelligence.
“One issue law firms can’t ignore is the need to invest heavily in technology, both to replace old systems and invest in emerging technologies such as Artificial Intelligence (AI). The successful firms of the future are likely to provide global services supported by virtual collaboration and widespread use of AI" said Mr Snell.
Source: PwC Annual Law Firm's Survey 2016 PwC, London October 24, 2016
But speaking of the law firm of the future, the report says:
"Most firms recognize the importance of digital and that it can add value across a broad range of areas, the most common areas being improved client experience and operational efficiencies. Notably, few firms are looking to use the technology to create new services or delivery models which suggests that law firms are not leading the wave of disruption that could affect the industry. There are clear winners and losers as seen by only 28% actually achieving any benefits."
The legal world is also discovering AI every day in ways that may be unexpected. Today, for example, a breakthrough study by a group of British scientists which could be used to predict the outcome of trials has been reported. "Software that is able to weigh up legal evidence and moral questions of right and wrong has been devised by computer scientists at University College London, and used to accurately predict the result in hundreds of real life cases," wrote the Guardian.
Looking to the young, four Cambridge university law students have just created a free artificial intelligence ‘chatbot’ using natural language input with the aim of clarifying whether a criminal offense has taken place and making it more likely the police will take victims of crime seriously - as reported by Legal Futures. It's interesting that both these examples are born of collaborative innovation.
Microsoft just hit the headlines with quarterly results beating analysts' expectations and causing shares to jump to the first record high in nearly 17 years, with the results widely seen as a reflection of the company's success in shifting more rapidly to the cloud under CEO Satya Nadella. But he also said recently that AI was as core to digital transformation as Cloud.
As they face the challenge of adopting new technologies, law firms in the U.K. also face another one. It will be "imperative for firms to redefine roles of the existing workforce to avoid further spare capacity" said Mr Snell at the launch of the PwC report this morning.
It's good to see that critical human dimension of digital transformation identified early in the game here, as it's another development that often comes late in other industries - like financial services -wrestling with the dynamics of rapid change.
The report is available on request from PwC.
