Passing the COVID test?

Confidence is returning to the legal sector, but Smith & Williamson’s annual survey shows that the recovery is far from complete. Andrew Fanning reports.

A new survey of law firms paints a picture of a sector that has begun to bounce back from the blows inflicted by the COVID-19 pandemic.

Like most of society, the legal sector appears to be looking tentatively towards the end – or at least the beginning of the end – of the disruption caused by the virus and the response to it.

However, Smith & Williamson’s annual snapshot shows that, while law firms are back on their feet and ready for the next round of challenges, they are still nursing some cuts and bruises.

This year’s survey covered 113 law firms – including 15 of the top 20. It indicates that, while 2021 was a year of adaptation and stabilisation, firms are hoping that 2022 will mark an acceleration away from pandemic-induced problems and allow breathing space to focus on some old and new challenges.

While 72% of all firms reported that COVID had a negative effect on them in 2021, only 41% are expecting a ‘significant’ or ‘moderately negative’ impact over the coming 12 months. Almost half (47%) reported an improved situation for their businesses over the last 12 months, with 43% saying that this continues.

When asked about the year ahead, however, the percentage expecting a better outlook rose to 61% – a dramatic turnaround from last year’s survey, when more than 70% expected a deterioration in conditions.

Profit recovery

In last year’s survey, worries about the economy – and particularly the costs of COVID support measures – topped the list of concerns.

These fears have dissipated somewhat, leaving the recruitment and retention of staff as the main issue occupying legal minds as we head into 2022. All of the top 20 firms surveyed – and 70% of those in Dublin – cited staff issues as their key concern.

COVID anxieties have not gone away, however, and half of all the firms surveyed said that one of their main worries was maintaining profitability.

A more detailed look at the financial findings of the survey shows why this is the case, despite a healthier 2021, in which turnover improved for 39% of all firms. For the top 20 firms, the picture was even brighter, with more than half (53%) recording an increase in turnover.

This improvement has probably been helped by a continuing reduction in discretionary spending in areas such as travel and marketing – 36% of firms continued to pare back such spending last year.

Turnover remains below pre-pandemic levels for two-thirds of firms, however, and profits are still lagging pre-2020 levels at almost 60% of the businesses surveyed. Not surprisingly, this meant that almost half of all firms continued to use the Government’s wage-subsidy schemes during 2021, though this was down from 70% in 2020.

People problems

After what Smith & Williamson describes as “a brief hiatus”, attracting and retaining talented staff has re-emerged as a significant challenge, particularly for top 20 and Dublin-based firms.

The survey finds that 35% of firms have been expanding their workforces again over the past 12 months – compared with 22% a year ago – and that more of them are offering ‘agile’ working options to attract and retain high-quality staff.

Previous research (carried out by Smith & Williamson on behalf of the Law Society’s Younger Members Committee) found last year that just over 90% of solicitors would prefer a hybrid working system, with only 5% wanting to work at home full-time and only 4% preferring full-time office work.

Equally important was the finding that almost two-thirds of solicitors said that they would make future career decisions based on a firm’s working policies.

The survey indicates that most firms are hearing the same message from their staff, and responding accordingly. Most of the top 20 firms surveyed are planning to continue facilitating remote working. The enthusiasm is not universal, however, with one-third of regional and one-fifth of smaller Dublin firms saying that they are unlikely to do so.

Perhaps illustrating the determination not to risk losing valuable employees, the survey shows that most legal firms have moved rapidly to reinstate pay cuts imposed due to the effects of the pandemic.

Last year’s survey showed that just over a third of all firms, and 60% of the top 20 firms, cut salaries. According to the survey, only 3% of those have not reinstated wage cuts implemented in 2020.

Pay increases were awarded in almost half of all firms – coming in above 6% in most cases – while most of the remainder kept pay at the same levels.

Bigger targets

The speed of the shift in working arrangements forced by the pandemic was bound to throw up a new set of problems, and cyber-security has emerged as the most immediate challenge.

Cyber-risk is now seen as one of the biggest challenges facing firms over the next three years, as reported by 27% of all firms – up from only 7% in 2020. While this was an issue that had already been flagged in the sector, last May’s attack on the HSE underscored the size and urgency of the threat.

Smith & Williamson says that law firms have seen themselves as targets of increased cyber-related activity. While two-thirds of the top-20 firms reported attempted cyber-attacks on their systems in 2021, none of these reported any significant impact from those attacks. Most cyber-attacks involved compromised email systems and attempted payment-redirection frauds.

Low level of M&A activity

Smith & Williamson finds a low level of merger and acquisition activity in the legal sector, with only one in five firms initiating an approach to another business. There was a marked drop in approaches from British firms seeking link-ups or mergers.

“Our own sense of the market is that there has been a significant uptick in this activity since mid-2021, as people reassess their priorities post-COVID,” the report says.

The survey is the tenth carried out by Smith & Williamson – a period that began in the aftermath of the financial crisis and included the upheaval of Brexit.

“The profession has, time and again, demonstrated its ability to weather major events and unforeseen disruption,” said Paul Wyse (managing director, Smith & Williamson).

The early signs are that it will get through a once-in-a-century global pandemic too, but not without some painful and enduring effects.  

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