Law firms: pressures and challenges

The pressures of economic uncertainty are a key concern for law firms.

Whilst interest rate rises have created the opportunity for law firms to earn additional revenue on interest from client funds, inflationary pressures throughout 2023 have led to both rising costs for law firms and pressures from clients to reduce fees for legal services. Whilst many firms fear a slower rate of growth in the demand for legal services in 2024 in the face of economic uncertainty, demand across the various legal services is currently expected to see some increase as the year progresses.   

Another key challenge for law firms is evaluating, updating and adapting their internal processes in response to changes in the market and technology, in order to stay competitive. This includes evaluating the firm’s long term strategy and planning, managing and monitoring key performance indicators such as utilisation, lockup and debt collection, ensuring that firms are equipping themselves with the right practice management software and most efficient communication tools, and considering their processes pertaining to the delivery of services to clients, for instance through the integration of AI within their processes.  

AI is said to be heavily impacting how law firms are expected to operate in the future, and its use is redefining consumer expectations and preferences. The increased use of automation can help to streamline tasks such as data analysis, or even billing and recovery, through the use of electronic billing and/ or payment systems. This can be used to generate efficiencies and create opportunities for law firms to cut costs. This goes hand in hand with some of the financial pressures mentioned earlier that law firms are facing, to remain competitive in a market where clients are said to be increasingly fee conscious. That being said, many remain concerned with regulation and security, meaning that there is some hesitancy in the adoption of AI.  

The confidential information held by law firms and the levels of client money held in client accounts mean that solicitor practices are at an ever-increasing risk from cybersecurity threats. In late 2023, a cyber incident involving CTS left some law firms locked out of their case management systems, leaving them unable to complete conveyancing transactions. According to data from the ICO and speciality reinsurance group Chancer, in the year to 30 September 2023, it was reported that breaches of cyber security had increased by 36% (to 226 incidents). The majority of cyber security breaches are often considered to be due to human error, with a minority down to intentional internal breaches. With this becoming an increasing area of risk, many are considering and evaluating their cybersecurity systems, penetration testing, recovery plans, the use of hosted environments, whether to run two client accounts to spread risk, internet security, and many more.  

Finally, one of the biggest challenges law firms are facing is how to attract and retain skilled legal professionals. Legal firms are experiencing a highly competitive market when it comes to recruiting talent, due to the shortage of skilled labour seen across the industry. This makes it increasingly important to retain and develop in-house talent. Many argue that AI can be used to streamline time consuming tasks such as data analysis or entry, both allowing staff to concentrate on strategic projects which can help with employee engagement, and also to facilitate improvements in work-life balance. Professional learning and development, career progression, and reward packages remain important factors to individuals, as well as the work environment and culture in which they operate. It is important that firms are mindful of these factors in order to attract and retain talent.  

These factors are very closely linked, and therefore it is important to consider the wider picture when evaluating the challenges your law firm is facing, and how these challenges can be turned into opportunities in a competitive market. Attracting and retaining talent is crucial to remain efficient and profitable in the face economic uncertainty, inflation and revenue pressures, as well as to provide high quality client service in a competitive market where customers’ expectations are evolving and there may be pressures to reduce fees. Many argue that AI can help with talent attraction and retention, as well as streamlining internal operations and processes to aid profitability as well as enhancing the customer experience. However, firms must be aware of the regulation, security and technological risks and ensure that they have appropriate measures in place to prevent and deal with the threat of cyber-attacks. Understanding and continually monitoring the environment is therefore key to help firms to stay competitive in the current market. 

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