Industry analysis from Thomson Reuters: Heads up on Brexit
This aritcle was also featured as an industry analysis in the December 2016 issue of Briefing. To read the issue in full, download Briefing.
The results were a true mixed bag. Common wisdom told us that demand for legal services would decline in the run-up to the Brexit vote – and the anecdotal evidence also largely supported that conclusion, both internationally and in the UK. However, the level of demand actually improved slightly in the first quarter of the UK financial year compared to the same time period a year earlier. Overall – and perhaps surprisingly – demand for services from the average law firm increased by 1.2%. Thomson Reuters Peer Monitor recently completed some analysis of the legal market in the UK as we can observe it through our sample of UK law firms and offices. Initially, this was focused on two key metrics – law firm demand (essentially, the appetite clients have for law firms’ billable hours) and average daily utilisation per lawyer based on lawyer full-time equivalents (FTE).Brexit has weighed heavily on economies and markets – in the UK, but also worldwide. Although the lasting impacts of the vote and the actual exit from the EU are yet to be seen, enough time has passed to allow us to begin to examine some possible effects.
Many clients were hesitant to make any significant moves in light of uncertainty about the vote – and the results certainly didn’t help to quell those uncertain feelings.
Do many hands make work lighter?
However, Brexit appears to have generated an increased appetite for advice and counsel. While 1.2% growth for the average firm may not seem like remarkable progress, it’s important to note that this represents average growth seen among the 37 offices of UK, US, and Australia-based firms in the total sample. The law of averages means there are some firms that exceeded this figure by a fair measure.
However, while increased demand is encouraging, this bright spot is closely followed by some less ‘exciting’ results.
Turning to the other key metric in the analysis, results showed that average daily utilisation per lawyer FTE dropped 6.1% for the second quarter of the 2017 financial year. While the average lawyer booked 4.41 hours a day in the second quarter of 2016, that average declined to just 4.14 hours this financial year.
So how can it be that lawyers are producing fewer hours this year than last, when demand for their services has increased? The answer is actually rather simple.
At the same time as demand grew by an average of 1.2%, the average firm’s lawyer headcount also increased, and by 5.3%. The average UK firm in the sample had slightly over 5% more lawyers on the books this year compared to last. There was more work to go around – and the smaller relative increase in work was very quickly snapped up by the proportionally larger number of hands looking for it.
The first complete quarter following the Brexit vote shows some potentially encouraging signs for the legal market. It certainly isn’t difficult to argue that the complexities of the act of leaving the EU will increase the need for wise legal advice – and firms would do well to position themselves as guides through this uncharted territory. But in so positioning, they would also be wise to manage their own growth carefully, avoiding the creation of unnecessary overcapacity.
Increased demand for legal services seems likely in the coming quarters – and the coming years. But if firms create a glut of capacity for this new-found demand, they may find themselves in a worse financial position. Increased demand that ultimately means decreased productivity and utilisation is a net detriment to the business model.
Uncertainty can create opportunity for law firms – and it will be interesting to track the various approaches firms now take to capitalise on this opportunity.
