The past year’s boom in dealmaking acted as a boon to the UK’s legal sector in leading to a major uptick in work for British clients.
However, the economic downturn could reverse law firms’ fortunes and dent their profitability, new research from Thomson Reuters shows.
Global law firms operating in the UK market saw their businesses bolstered by the global boom in dealmaking activity, as the number of hours of work undertaken for UK clients increase 12.2 per cent, between 2020 and 2021, the report says.
The uptick came as major increases in demand for Tax and Mergers & Acquisitions (M&A) services offset lower demand for law firms’ other practice areas.
The report shows demand for M&A services jumped 21.5 per cent, as demand for tax services increased 15.5 per cent.
Lucinda Case, managing director of Thomson Reuters Legal, said: “Record levels of deal activity last year prompted a spike in demand for legal advice relating to M&A.”
The increase in the total number of hours worked came as the number of lawyers increased by just 2.6 per cent in a sign lawyers simply worked longer to keep up with booming demand for their services.
Julian Pritchard, head of Global Transactions at Freshfields, said: “2021 was the busiest year on record for global M&A, and we saw more and more clients needing sophisticated M&A and regulatory advice on both sides of the Atlantic.”
However, the economic downturn has in recent months dented law firms’ profitability, as the end of the dealmaking boom has led to lower demand for legal services.
“The next period is likely to see a more selective approach to M&A – the current market uncertainty is impacting conviction for M&A, and a new normal is yet to be established,” Pritchard said.
The downturn has seen demand for all legal services in Q2 2022 drop to levels 0.5 per cent lower than in Q2 2021, due in part to a 4.9 per cent drop in demand for M&A services.
Mike Abbott, head of the Thomson Reuters Institute, said: “Last year’s tailwinds have turned into this year’s headwinds.”
“Demand was inevitably going to drop following two years of exceptionally high growth. This combined with rising expenses, have dented profitability amongst law firms.”
The slowdown comes as the battle for talent has forced law firms to offer their lawyers increasingly high salaries in order to win over top-ranking talent.
Fierce competition for legal talent saw lawyers salaries increase by 12.4 per cent throughout the year as legal sector pay surged to record levels.
Efforts to recruit more staff also increased law firms’ overheads, as they were forced to bolster their recruitment and business development departments.
“The tight labour market has forced firms to increase compensation at associate level, in order to attract and retain the brightest talent,” Abbott said.