Growth of law firms hampered by fierce competition for employees with IT sector

“For example, while in 2018 the number of new law firms entering the market increased significantly, in 2019 the number of newcomers decreased and has not reached pre-pandemic levels. There may be a number of reasons for this – firstly, the continued consolidation of the market in the hands of larger players, and risks arising from economic uncertainty and unpredictability, to which smaller firms are certainly more vulnerable,” says Karin Oras, Managing Partner at KPMG Law.

A significant trend worth noting is that in the last five years the comprehensive income of law firms has essentially doubled. Considering that the sector’s sales revenue has increased by an average of 11% every year, we can see that profit growth has been significantly faster, and this has also ensured a large increase in profit margins, which have risen by more than 25% in recent years. On the one hand, this demonstrates the increasing efficiency of law firms’ business activities, but it certainly reflects the wider economic and market environment – transaction activity, the growth in the volume of regulatory advisory business and the high level of litigation. The renegotiation of remuneration models should also be taken into consideration, as remuneration is mostly paid to partners on account of profits when increasing business volumes.

The number of people employed in the sector has never declined, but its growth has been slowing in recent years. The downward trend in the growth of the number of employees in law firms started in 2020 and continued in 2021, most likely due to the macroeconomic situation caused by the pandemic, which made law firms more cautious in recruiting new employees and more conservative with respect to expansion. On the other hand, law firms are under constant pressure to hire more and more new professionals, as other sectors are greedily absorbing their highly experienced workforce – primarily the technology and financial sectors, which are able to attract large numbers of experienced attorneys with their high salaries and option plans. The recruitment market is highly competitive and finding experienced people is increasingly difficult.

Gross salaries naturally continue to grow, but their growth clearly slowed down in 2019 and 2020. It will be fascinating to see how law firms’ salaries grow this year, with the economy being affected by a number of other factors apart from the coronavirus crisis, ranging from the war in Ukraine to inflation and energy prices, the impact of which is transferred to law firms’ day-to-day business via their clients in various sectors. For many firms, the main challenge will be to balance continued salary growth with sufficient turnover growth in a situation where forecasts are made in highly volatile and uncertain conditions.

So far, the turnover per employee has been increasing from year to year, and in 2021, the expected turnover per employee exceeded 115,000 euros. Previously, it had been around 100,000 euros for several years. Added value per employee has increased by an average of 10% per year, which means that law firms are still benefiting from expansion and the recruitment of new staff.

However, this brings us back to the central challenge for law firms: how to find qualified employees with a high degree of added value while competing with the technology sector with salary levels. The reality is that today technology companies are still able to solicit employees with their salaries, and this trend is likely to continue for some time. For law firms, this means that they need to offer something else in addition to remuneration – motivate people by defining the role of attorneys better and providing more exciting and varied challenges. While the financial and IT sectors can offer better salaries, law firms certainly offer more diverse challenges and experience, which for many people is more important than the salary figure.

In addition to finding people, law firm managers also need to think about retaining and developing people and their key skills. You can raise salaries, but in the war of attrition against the technology sector, even the most capable law firm will lose. Therefore, the role of law firm managers is no longer limited to establishing client relationships and providing top-quality legal advice; managers must also be the builders of the organisation, leaders and team mentors. Enabling shared goals, diversified personal fulfilment and meaningful work is what keeps the people of this field together.

“A capable, experienced team with versatile competencies that functions well together is a prerequisite for implementing the most complex and challenging largescale projects, helping clients to solve their business issues and supporting their growth ambitions,” says Karin Oras, summarising the issue.