£20 notesAn influential report by PwC out today (24 October) concludes that law firms need to invest heavily in technology and find new ways to pay for that investment, as growth slows in the face of increasingly tough market conditions.

In its annual Law Firms Survey 2016, PwC says that 75% of the top 100 UK law firms reported revenue growth in 2016, down from 82% in 2015.

Overall financial performance in the sector has been flat due to increased headcount and salary costs against a drop in chargeable hours and hourly rates.

Against this backdrop, consolidation through lateral hiring programmes and firm mergers is again on the rise.

While confidence returned to the sector last year, resulting in the top 50 firms increasing headcount by 7.6% on average, the market is turning out to be more challenging than expected, made worse by increased competition from US firms and Britain’s decision to exit the EU.

Spare capacity is now an issue and David Snell, partner and leader of PwC’s law firms advisory group, said: “Despite partner numbers being tightly controlled, spare capacity has increased and is a cause for concern, particularly with the increased uncertainty around Brexit. Workforce management and deployment has remained unchanged for many years and we expect the better performing firms in the future will be those who can improve the agility of their workforce both between practice areas and globally.

“One issue law firms can’t ignore is the need to invest heavily in technology, both to replace old systems and invest in emerging technologies such as Artificial Intelligence (AI). The successful firms of the future are likely to provide global services supported by virtual collaboration and widespread use of AI. The adoption of new technologies, however, will make it imperative for firms to redefine roles of the existing workforce to avoid further spare capacity.”

While the legal sector has proved to be adaptable Snell added: “However, increased competition, changing client demands and rapidly evolving technology will all require attention and financial resources. Firms will need to continue to innovate, remain agile and find new ways to finance what will be a period requiring significant financial investment.”