Succession plans are floundering as a result, the survey launch heard, as equity partners seek opportunities to access their capital.
Smaller firms in Dublin are looking for solutions as to how partners can access their business equity, and are casting around for suitable succession candidates.
Big firms continue to see lateral hiring as their best opportunity for growth but one in three top 20 firms now see merger and acquisition as a potential strategy for future growth.
The significant uptake in LLP structure in the big firms makes M&A easier and more is likely in the future, Paul Wyse of Smith & Williamson predicted.
There has been a significant uptake in LLP structure in top 20 firms, he said.
Confidence for the year ahead has returned to two out of three of all firms surveyed, which is a higher level than has been seen in the last five years.
Of the top 20 firms, two out of three have seen an improvement in confidence and almost all predict an improvement next year, according to the Smith & Williamson survey.
For regional law firms, two in three believe things have stabilised, with 40% anticipating an improvement next year, with the balance expecting stability.
Only a minority of firms enjoyed revenue and profitability at pre-pandemic levels, while at the peak of the virus, 40% of firms saw a decline in revenue of at least one-fifth.
Decreases in profits were significant for smaller firms. This year, 39% of firms saw revenues recovering, with two in three seeing a jump of over 10%.
However, staff retention continues to be a significant issue, and the war for talent has been added to by COVID, as many lawyers re-evaluate their working lives and work-life balance.
Many have decided to seek new jobs, which has significantly increased the pressure on firms to recruit and retain talent, said Paul Wyse of Smith & Williamson, at the survey launch.
Wyse said that the profession was facing ‘The Great Resignation’, with many looking for a change in how, when, and where they work.
Employees report feeling tired and isolated, and employee burnout is a concern, the survey shows.
Firms may need to give employees a renewed and revived sense of purpose in their work, because workers want social interactions with colleagues, friends, and senior leaders – and they want to feel a sense of shared identity and of being valued by their organisations.
Working from home has been shown to increase productivity levels, according to a recent PwC survey.
Most professional service firms had not previously facilitated home working on such a grand scale, Wyse added.
“We have less concerns about productivity now, and most firms have successfully adjusted their working practices and systems to accommodate remote working,” he said.
The survey shows a broadening disconnect between how employers and employees see the future of the workplace.
Firms should bear in mind that work-life balance and flexible working are of paramount importance to the majority of those working in the profession.
Many have stated that flexibility will influence whether they remain with their employer, Wyse said.
The top 20 firms are very likely to offer flexible working arrangements; however, smaller firms are less likely to do so.
The survey shows an increase in numbers employed. The top five firms have seen an 8% increase in staff numbers, while the next 15 firms have seen a 4% increase.
During COVID, 40% of the top 20 firms implemented pay cuts of more than 10%, but most have now reported reinstating salary levels.
Some have had to make salary increases from a recruitment and retention perspective. Pay increases are reported, with more than 6% in half of all firms giving pay rises.
There has been a continued reduction of partner drawings in 42% of firms.
And the deferral of pay reviews and appraisals has continued in some firms, while 36% of all firms have continued to reduce their discretionary overhead spend (53% of top 20 firms).
Those seeing a long-term reduction in office space has reduced from 37% of all firms in 2020, to 19% of all firms in 2021.
Staff concerns have been expressed about loneliness and isolation, staying motivated, and physical workspace. The advantages reported include no traffic or commutes, greater flexibility as to managing the working day, and the reduced cost of commuting.
“The return to the workplace is a chance to create a new, more effective, operating model that works for people and businesses navigating a world of increasing uncertainty,” Wyse said.
Law firms learned from the financial crisis that acting quickly has an immediate effect, he said.
Last year, firms slashed overheads quickly, especially in the top 20 firms.
Many firms continue to avail of Government supports, and many have looked at their business processes with a view to making them more efficient.
The productivity increases from remote working have also been taken on board, Wyse added, with many firms making significant investments in technology.
However, cyber-risk is an increasing concern for one in three firms in the sector, and for almost one in two regional practices in the past year.
Remote working brings increased risk of cyber-attack as systems are more vulnerable, with resulting financial loss to client bank accounts.
Most of these attacks involve compromised email systems and payment redirection. Overall, only a third of firms report being subjected to financial loss through cyber-attack.
Increased training and testing of staff have become vital tools in the battle with cyber criminals, the report says.
“We believe this is being significantly underreported," said Paul Wyse, adding that smaller firms may not have the reporting or risk-management systems in place to identify or mitigate the problem.
Cyber-security, therefore, remains a key investment area for law firms.
The survey reports that cyber-security is now seen as a problem by 40% of firms.
Many firms continue to avail of Government supports, with one in two taking wage subsidies temporarily during the past 12 months.
The impact of COVID on the legal sector has continued to be largely negative during the past year, as reported by 72% of all firms (94% in 2020), though it has had less of an impact than feared.
This negative impact is diminishing and should reduce over the next 12 months, with 41% of firms expecting a significant or moderately negative impact, and 42% of firms expecting no impact for the next 12 months.
One in five continue to use the pandemic unemployment payment, and this figure was one in three in the regions, down from 50% in 2020.
In addition, one in three firms continue to use the tax-warehousing-deferrals system put in place by Revenue, with 27% of top firms also availing of this.
There has been a noticeable reduction in the number of top 20 firms using Government support this year (47%) – down from 60% in 2020.
This has been critical to the underlying sustainability of many legal practices during the last 12 months, Paul Wyse said.
Giles Murphy added that, in Britain, the profession also took full advantage of support schemes, with the result that some were in a slightly embarrassing position, in that revenue had grown significantly, alongside a reduction in spend, leading to high levels of profitability.
Some firms have had divisive partner meetings over whether furloughed money should be repaid or not, he said, with many sitting on record cash balances.
The pandemic may have deferred some of the consequences of Brexit, he suggested.