Despite a change in government this summer, economic uncertainty lingers in the UK with lacklustre growth performance in the weeks following Labour’s landslide victory. The global outlook is no less murky despite indications from major central banks of modest rate cuts, with all eyes on the US presidential election later this year, and ongoing geopolitical volatility threatening to set off further shocks and compound business risks in a world still recuperating from Covid and reorienting itself to the generative artificial intelligence (genAI) juggernaut.
Held just days before the UK general election, the mood at LPM Conference 2024 was, however, largely buoyant. In our own poll of delegates from over 70 SME law firms, eight out of every ten leaders generally feel optimistic about their firm’s position in the legal market of the future — with only one out of every ten leaning negative.
That said, when rating the intensity of the challenges their businesses face over the next two years, about two-thirds (65%) of our SME legal community believe them to be more (50%) or much more (15%) serious than in past years.
So, what is accounting for these dual, and perhaps conflicting views?
There’s the promise of potential calm, notes Brigitte Lechthaler, head of operations at employment firm BDBF, once the new government settles in, sets policies and announces its first budget later this autumn. But, she says, “Firms still need to find ways of addressing growing competition, and changing talent and client expectations, to achieve sustainable growth.”
London-based planning firm Town Legal’s chief financial and operating officer Seema Jones sees both sides of this coin: “There is a lot of optimism, but business leaders are faced with plenty of challenges — chiefly managing a growing cost base. Then there are complexities around changes in the ways we work and different schools of thought around flexible working, as well as technology and genAI. These are the three key challenge areas — but equally, they could be viewed as opportunities.”
Laying down the law of talent attraction
Unsurprisingly, attracting and retaining top talent (39%) remains the number-one factor impacting the SME legal market in 2024, followed by a rising cost base (24%) and the compliance landscape (15%). In LPM Frontiers 2024 published earlier this year, seven out every ten firms surveyed said recruitment and retention had become significantly more challenging in the past year.
While big law’s ever-burgeoning renumeration packages are often discussed as a point of concern among the SME legal cohort, in truth smaller firms may be at an advantage. Massive salaries beget massive expectations to hit billable-hour targets, and Fox & Partners chief operating officer Emma Sell says that the London-based firm is noticing a lot more interest from silver and magic circle associates, which she attributes to the firm’s ability to offer a better work-life balance.
Even so, there’s still stiff competition to attract “the best of the best” candidates, and at BDBF Lechthaler believes a firm’s reputation and culture has a vital role to play in shaping a compelling employee value proposition, along with “creating appealing work environments, offering competitive benefits, fostering inclusion and staying adaptable to changes in the industry”.
Niche legal businesses in particular need to give this serious thought, says Zoe Bailey, chief strategy and operations officer at IP law firm Withers & Rogers, given the relatively small pool of qualified patent attorneys in the UK: “If you’re fishing in such a small pond, having complete clarity around your culture and values is key. It’s a bit like matchmaking — relationships only work when both sides are entirely honest about what they want.”
Are we there yet? Closing in on the real deal with genAI
More than half of SME legal leaders polled at the conference believe that generative artificial intelligence (genAI) will dramatically change or improve both legal service delivery and back-office processes within the next two years.
Withers & Rogers is among those SME firms to have rolled out Copilot since its launch last year. With an AI task force and policy in place, the business is looking at “generalist use cases” where they might realise immediate benefits, and Bailey finds that “people really have embraced it to do the more administrative parts of their work” with scope for improving efficiency, “which we hope to pass on to our clients in the future”.
Lechthaler is of the view is that genAI will play a big role in the legal market by 2026, both in how legal services are delivered as well as how firms operate more generally: “Its ability to automate routine tasks, improve decision-making, and offer more personalised client services will help firms stay competitive in a rapidly evolving market. That said, it requires careful consideration.”
Jones, who says Town Legal has taken a “conservative but open stance” towards genAI, agrees: “It’s important to recognise the risks and be very clear on governance and safeguards, and then to think through pinch points in your processes to see what value will in fact be delivered by introducing an AI-based solution. There’s also the cost factor, and while the general assumption is these tools will become more accessible to the SME market over the next couple of years, the more significant concern is safety and trust.”
Brian Inkster, founder and CEO of Scottish fee-sharing firm Inksters, aligns himself with the third of leaders who don’t think genAI is likely to make a significant impact any time soon. He believes it’s important to take all the buzz surrounding it with “a big pinch of salt”, adding: “There’s been an awful lot of hype — more noise than actual, practical examples of where it’s really making a big difference within a firm. And if you break down all the tasks lawyers perform day-to-day and look for the best tech to help make these more efficient, it doesn’t necessarily follow that genAI is always the answer.”
But first: Reckoning with the ghosts of tech past and present
SME firms have a myriad existing tech challenges to contend with before they get carried away by the allure of sparkly new solutions. More than half of all conference goers (58%) say integrating legacy or existing systems with new technologies is a significant (33%) or very significant (25%) business-critical problem for their firm.
The extent of the issue likely depends on each individual firm’s journey, says Jones, and a relatively young and small firm like Town Legal “can be quite agile in decision-making and tech adoption”. That said, the investment outlay is never cheap, and given the rapid pace of technological change and an overwhelming array of solutions available, there may be some inertia among firms around decision-making that might lock a firm down one path.
Challenges are magnified even more for a niche legal business, adds Bailey, who finds that with few IP management systems to choose from, being too reliant on a particular tool can limit firms’ ability to innovate, especially if they do not have access to good in-house expertise, adding: “Our internal team are incredibly knowledgeable and this has taken time to develop.” At Fox & Partners, which is in the process of transitioning entirely to SaaS, Sell finds that “core systems — case, document and financial management — aimed at the SME legal segment tend to lack flexibility, whereas boutique firms actually require quite tailored solutions”.
And with four out of every five leaders reporting that their firm has unused/underutilised tools in their tech stack, clearly the spectre of shelfware is still a significant issue haunting many an SME firm.
Even among the more tech-savvy, Inkster finds that it’s all too easy for SME firms to buy products they don’t really need: “Smaller firms aren’t as bogged down by having to sweat off the cost of a legacy system before they can buy the next thing, but there’s still the risk of biting off more than you can chew,” he says, suggesting that it’s vital for firms to be clearsighted and focus on developing their core legal tech before introducing additional tools to juggle.
For Bailey at Withers & Rogers, it comes down to the users: “People need the time and permission to train and upskill, and I wonder if firms should set that as a strategic ambition for themselves,” in addition to some much-needed process improvement work: “A lot of variety and variability in working practices and how systems are used within the same organisation places a lot of demands on your people. Consistent processes and stakeholder management are critical.” At Inksters, which has a dedicated legal process engineer role to streamline workflows, its CEO notes: “This is an ongoing project — the work never really ends.”
Jones also believes legal tech vendors can do more to support better adoption and fuller utilisation among the SME cohort. “Too often suppliers will put their feet up after the go-live, but more ongoing, regular engagement would be a game changer.” This view is shared by most legal business leaders, and several point out that selling training and support services separate to the product, which some providers do, is far from ideal and leads to poor adoption and underutilisation.
No let-up in compliance concerns
With the compliance landscape now in third place among factors impacting the UK’s SME legal market (having risen from 6% in 2023 to 15% in 2024), two-thirds of delegates polled believe managing compliance and regulation to be significantly harder (32%) or a bit harder (35%) than last year.
Lechthaler at BDBF notes a range of regulatory changes impacting legal services, from data protection laws such as GDPR and CCPA to industry-specific compliance requirements, complicating the compliance landscape and compounding business risks. “To effectively manage these stressors, SME firms may need to invest in further training, new technology and seek advice on meeting their compliance obligations.”
Several leaders note a perception within the community that the Solicitors Regulation Authority (SRA) has been acting more stridently, particularly with SME firms, than in previous years.
Jones provides some context to this perspective: “There have been a few situations that have prompted addition scrutiny from the SRA, such as the impact of sky-high interest rates on client accounts, the fallout of Covid lockdowns that led to a spike in conveyancing claims, and the knock-on effect on professional indemnity insurance. I think when the SRA changed the rules, it gave a bit more room for interpretation — so if one firm goes one way and another the other way, how do you decide which is fair and who’s following the guidelines correctly? It’s grey areas like these that probably cause the most confusion.”
Bailey finds that while developments in the compliance space tend to trickle down more gradually to IP firms like Withers & Rogers, which are governed by the Intellectual Property Regulation Board, similar challenges are beginning to manifest. That said, she believes smaller firms may have a slight advantage in being nimbler than larger firms with more entrenched policies and processes — “provided you have enough resources”.
Resourcing appears to be the operative factor in compliance pressures feeling increasingly burdensome, with Sell observing that many SME firms simply don’t have dedicated teams to stay on top of ever-changing regulatory requirements. Inkster, too, is seeing more interest from smaller firms and sole practitioners wishing to join a larger practice like his that have the capacity and capability to “deal with all the red tape”.
Scottish firms like Inksters are governed by the Law Society of Scotland (LSS), which unlike in England and Wales retains both membership and regulatory functions. This has led to a degree of conflict, he says, with grumblings that the LSS is too focused enforcement at the expense of playing a more enabling role to support firms with meeting their compliance requirements.
Conclusion
Going into 2025, it’s unlikely that the haziness of the first half of the 2020s will immediately give way to clearer skies. SME firms will need to continue the hard work of fortifying compliance procedures, harmonising tech estates and engaging their workforces. But leaders certainly seem clearsighted about how to navigate these challenges to bolster business resilience and drive sustainable growth. Of course, we’ll gather again at LPM Conference next year to benchmark business sentiment and progress made on these and other fronts among our community of SME legal business leaders. Stay tuned!