Law Firm Leadership Series 2023

A new era for law firms

Financial health and sustainability

The overall outlook for the financial health of law firms is not as positive as it has been. As we explored in the second article of this series, there are plenty of economic headwinds and challenges in terms of growth and revenue ahead for law firms. These challenges do not seem to pose an existential threat and many of the leaders we spoke to remain confident when they look forward to the next 12-18 months.

To start on a positive note, the labour market has rebalanced. Firms are no longer having to chase new talent or offer significant financial rewards to current staff to retain them. There are signs that inflation is beginning to peak. This will reduce pressure on interest rates, help law firms maintain a grip on rising costs and relieve pressure on working capital by maintaining the cost of borrowing.

However, the less than rosy outlook is compounded by three new developments that will require investment or reduce the financial liquidity of law firms. First, law firms are having to adapt their physical offices to support new hybrid and agile ways of working. Secondly, firms are having to consider how and how much they invest in AI. Finally, the changes in how Partnerships are taxed are going to severely reduce the funds that law firms have traditionally used as working capital.

New offices for new ways of working

Whatever their flexible working policies or their long-term visions for their workforces, law firms are having to adapt to, and cater for, changing workforce expectations. Some degree of hybrid working has become the norm for all firms. Even the firms that have most aggressively sought to return to pre‑pandemic working practices, with a minimum of four days a week in the office, have had to accept that the world has changed.

During the pandemic, firms were forced to invest in their IT systems and their technology stack to support completely remote working. They had to ensure that they could continue to serve their clients securely and efficiently through technology. Law firms have had to maintain that technology because their workforces continue to work remotely for significant amounts of time.

As law firm workforces return to using offices, their expectations of the workspaces have fundamentally changed. They use the offices to hold meetings and to collaborate with colleagues. They expect meeting rooms to support hybrid working with participants joining in person as well as remotely. Collaboration spaces to support planning, training and communication activities are also needed to support the activities that must happen in offices.

New offices for new ways of working

Law firms have had to invest substantially in their office spaces to respond to these changes. Finding or creating the kind of work environment that meets the needs, and desires, of their workforces is costing law firms. Relocation or refurbishment does not come cheap against a background of high inflation.

Providing the technology that supports hybrid working and hybrid meetings is another significant outlay. Firms are having to provide, and maintain, the right hardware in every meeting room and on every hot desk.

Some of this cost may have been offset by the reduced amount of space needed by firms. Hybrid and remote working do mean that fewer desks are needed, and some space can be released. Though not always as much as might be expected. Those collaborative, high-tech meeting spaces also require plenty of square feet. Firms are torn between a desire to bring people into the office to maintain culture and provide a thorough training experience to younger lawyers, and a desire to save money by shrinking their office floorplate. But if firms insist on everybody attending 3 or 4 days a week, how much office space, and, with it, how much money can really be saved?

Paying for revolutionary new technology

Every firm we spoke to is in the process of investing in AI in some form, with law firm leaders all stating that they cannot afford to ignore the commercial potential of AI. We discuss some of that potential impact and other knock‑on effects in a later article in this series. The point here is that AI represents another substantial investment. Law firms are either already investing or are aiming to be 'fast followers'.

AI technology must be sourced, adapted to the specific requirements of the firm and then implemented. Staff must be trained on when and how to use AI effectively and safely. This is a relatively new market with providers able to charge high prices for their software and services. This is even more true as they can point to a direct impact on a law firm’s immediate bottom line. One leader we spoke with shared how the current ticket price of a proposed AI package equated to a doubling of their current yearly IT spend. This poses the questions, how will law firms fund this substantial new investment and the ongoing costs of maintaining and upgrading AI technology?

Changes to taxation and working capital

HMRC are changing the way partners are assessed on their profits from Partnerships through basis period reform. For an analysis of Basis Period Reform and how it will impact law firms, please refer to our article on Business Profit Tax Changes 2023-2024. Many Partnerships retained tax on behalf of partners and used it as working capital pending it falling due to HMRC. The tax will, for many Partnerships, now have to be paid much sooner.

Partnerships, and individual Partners, are having to provide additional or new working capital to replace the working capital which had been held in tax reserves. Their normal first port of call for any borrowing needs has always been banks. However, interest rates are at a 20-year high and the cost of replacing the missing working capital can be significant. This is more significant because law firms must also fund their investments in new or refurbished offices, and AI. For more information on what Partnerships should do next, please view our additional article on Basis Period Reform.


We have seen that law firms are facing a few issues that may affect their financial health and resilience with key areas requiring substantial investment and a change in tax regulations hitting working capital. While it would be hard to argue that anything discussed in this article undermines the long term sustainability of law firm finances, law firms must find effective and affordable means to mitigate the immediate pressures on their finances.

In the end, the solution may simply be more borrowing and taking the hit on higher interest rates. Nonetheless, this may be a difficult moment for some law firms and their leaders may need to make some tough decisions. That may include having to review staffing in areas of the firm where work has dropped off. Inevitably, when demand reduces there is a balance to be had between reducing staff and holding on in the expectation of an upturn. As time passes, the cost of holding on may become more of a concern.

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