While corporate general counsel and law firm leaders in the UK are optimistic after a strong close to 2023, warning signs continue to flash about continued challenges this year
Like most global markets, the United Kingdom has been marked by a sizeable dose of volatility over the past four years. In fact, 2023 provided a few crystal-clear examples, particularly regarding the perspective that corporate general counsel (GCs) have on the outlook for their expenditures on outside counsel.
According to the 2024 State of the UK Legal Market report, recently released by the Thomson Reuters Institute (TRI), GCs anticipated expenditures fluctuated wildly throughout 2023. According to the report, the net spend anticipation (NSA) score — a measure of what GCs expect to spend on legal services — swung from a quarterly high of 24 in Q2 2024 to a low of -1 by Q3, only to recover to a year-end score of 22.
The NSA score is calculated by asking GCs whether they expect their spend on outside counsel to increase, decrease, or stay the same over the coming 12 months. The percentage that anticipated a decrease is subtracted from the percentage that anticipate an increase, and the result is the NSA score. For example, in Q4 2023, 40% of UK-based GCs surveyed said they anticipated an increase in outside counsel spend, while 18% anticipated a decrease, resulting in an NSA score of 22 for the quarter.
The year-end mark is actually on the high side of recent years, nearly matching the high-water mark set in 2023 and comparing very well to other years. However, what is most remarkable about the NSA scores in 2023 was their incredible volatility.
NSA score on the upswing
After starting 2023 on a relatively even keel with the prior year, the NSA score doubled in Q2 2023 before dropping into negative territory in Q3, then rebounding massively to close the year. While quarterly fluctuations in NSA scores are certainly normal, such a wide swing is quite uncommon. In fact, it is relatively rare to see an NSA score dip into negative territory at all and when it does, the rebound effect is typically much less pronounced.
With that in mind, the massive jump in NSA is encouraging. The percentage of GCs anticipating an increase in their outside counsel spend in Q4 was among the highest tracked. Additionally, several key practice areas also reported double-digit positive NSA scores, including regulatory, insurance, banking & finance, labor & employment, and even M&A. These are all positive indications that the legal market in the UK may be on the upswing.
However, law firm leaders in the UK are also justifiably cautious about the potential impact of broader macroeconomic factors. Many GCs have reported in interviews with the TRI that much of the uptick in M&A work is being driven by investment from the US, tying the performance of that practice to the economy in the US, which continues to be in flux. The potential impact of the impending US elections and continued uncertainty about interest rates in the US could play a factor in transactional practice performance in the UK throughout the year.
Additionally, the UK is facing the potential of its own elections by the end of 2024, creating more potential uncertainty. At the same time, markets in the European Union continue to struggle, impacting the potential for continental work for UK law firms.
Interestingly however, volatile times can also be fruitful times for law firms. As businesses struggle to cope with changing market conditions, they often look to their lawyers for assistance in protecting the business’s interests and meeting the challenges that often accompany economic changes. For example, both 2016 and 2020 ended up being very strong years for law firm financial performance despite massive upheaval due to major elections in both years plus the introduction of Brexit in 2016 and the pandemic in 2020.
UK law firms that can position themselves to effectively meet their clients’ key challenges and priorities and bring value to the client may well capture an increased share of client spend. According to the TRI report, clients are placing top priority on being able to provide commercially viable, strategy-driven advice to their organization, and they’re looking for outside law firms that can do the same.
The opportunities for law firms to have in-depth conversations with their key clients about the evolving needs of the clients’ business should not be missed. Those firms that ask the best questions and do the most to deliver on clients’ commercial needs are the ones most likely to gain additional work and finish the year on top.
You can download a copy of the Thomson Reuters Institute’s 2024 State of the UK Legal Market report, here.
