More law firm mergers ‘inevitable’ as squeezed middle comes under pressure, says PwC

More mergers among UK law firms are inevitable as mid-market players struggle to compete with global firms and smaller specialists, according to PwC partner and professional services sector lead Mark Anderson.

PwC’s latest law firm survey found that more than 90% of respondents were growing. But performance is beginning to diverge across the market, Anderson tells The Non-Billable Podcast.

The top ten recorded fee growth of 6% and profit growth of 13%. By contrast, profit margins among firms ranked between 26th and 50th fell by 3% - the first decline Anderson could recall during his time working on the survey.

A market pulling apart

At the top of the market, larger firms can invest more heavily in technology and international expansion, as well as top tier talent. That scale gives them access to larger clients and more lucrative work.

Smaller firms can compete through agility and deep expertise in particular sectors or practice areas. That leaves firms in the middle facing a choice about where they sit.

“Directionally, you need to know where you’re going,” Anderson says. Firms must decide whether to pursue the scale required to compete internationally or remain smaller and focus tightly on the areas in which they are strongest.

Asked whether that pressure would produce more mergers, Anderson says: “I think that’s inevitable.”

Those deals could involve combinations between UK firms or further tie-ups with firms in Europe and the US. Anderson says successful mergers will still need to offer more than defensive scale, including growth opportunities or operational savings.

The AI investment gap

AI could also widen the divide - PwC found that around two-thirds of firms surveyed had implemented AI and were seeing productivity gains, but only 8% said they had monetised those benefits.

Early adopters are beginning to see returns after spending the last two years building their own knowledge and processes into platforms. Anderson expects the gap to continue growing as larger firms invest more heavily and those further behind try to catch up.

For now, despite much market noise about external capital coming into law firms, partners continue to provide around 80% of law firm funding needs. Anderson sees little sign of private equity reaching the heart of large commercial partnerships, although external investment could support ring-fenced businesses handling higher-volume repeatable work.

“The partnership culture is alive and well,” he says.

Listen to the full conversation with Mark Anderson on The Non-Billable Podcast.