Professional services firms balancing growth ambitions with rising regulatory and operational pressures

Professional services firms remain focused on growth despite mounting concerns around taxation, government policy, talent shortages and cyber security, according to Armstrong Watson's 2026 Family, Privately Owned and Owner-Managed Business Survey.

The findings, which include responses from a number of law firms, suggest that while businesses across the professional services sector are continuing to invest in technology, people and long-term planning, many are navigating an increasingly complex operating environment shaped by legislative change, inflationary pressures and evolving compliance requirements.

Tax and policy concerns move centre stage

Against a backdrop of significant political and fiscal change, the survey found that concerns around increased taxation, inflationary pressures and government policy are now among the most significant issues facing privately owned businesses over the next 12 months. Across all respondents, 86% expressed concern about increased taxation, while 84% cited inflationary pressures and 82% pointed to changes in government policy.

For professional services businesses, these concerns are particularly relevant. Many firms are grappling with rising employment costs, changes affecting succession and business taxation, and the need to adapt to an evolving regulatory landscape.

For law firms, these concerns are compounded by a period of significant regulatory change. The Solicitors Regulation Authority's reform agenda announced earlier this year has prompted many firms to review their operating models, governance arrangements and compliance procedures, adding another layer of complexity to an already challenging business environment.

The survey findings reinforce the importance of maintaining robust governance structures and regularly reviewing business and succession plans to ensure firms remain resilient as policy reforms continue to emerge. For example law firms may need to consider how they adapt to the Ministry of Justice reforms affecting interest earned on client accounts, reassessing how they maintain profitability and financial resilience in response to the changes.

In a sector where profitability is closely linked to people, compliance and client demand, changes to taxation and policy can have a direct impact on strategic planning and investment decisions.

Recruitment challenges persist

Access to talent continues to be a major challenge for businesses, with 74% reporting difficulties recruiting new talent. A lack of suitably skilled candidates remains the most commonly cited recruitment issue.

These findings will resonate with law firms, many of which continue to compete for specialist legal talent in a constrained labour market. Recruitment challenges are increasingly influencing growth strategies, service delivery and succession planning decisions.

Encouragingly, businesses are responding proactively, with 56% who have introduced measures aimed at improving staff retention. While 68% have increased wages and salaries above inflation, the results highlight a growing recognition that attracting and retaining skilled professionals requires more than competitive remuneration alone.

Seven in 10 have introduced flexible working arrangements, while 56% have improved benefits and 48% operate salary sacrifice schemes, all of which are becoming increasingly important differentiators as legal professionals place greater value on flexibility, wellbeing and achieving a sustainable work-life balance alongside career progression.

At the same time, firms must remain alert to evolving employment and tax obligations. Recent legal developments surrounding LLP member status have highlighted the importance of ensuring remuneration structures and governance arrangements reflect both commercial objectives and regulatory requirements.

Cyber security remains a boardroom issue

The survey also demonstrates the growing significance of cyber risk, particularly to legal and professional services firms where more businesses reported experiencing a cyber incident than the national average (44% compared to 31% across all sectors).

For legal and professional practices responsible for handling sensitive client information, cyber resilience is no longer solely an IT concern. Regulatory obligations, data protection requirements and reputational considerations mean cyber security must be treated as a strategic business issue.

As cyber threats continue to evolve, firms are likely to face increasing pressure to strengthen governance, undertake regular risk assessments and ensure appropriate policies and controls are in place.

AI adoption gathers pace

One of the most notable findings from this year's survey is the rapid acceleration in AI adoption, which is particularly prominent among professional services firms, with 58% now using AI within their business and a further 28% actively considering implementation.

Among those already using AI, the most common applications include data analysis (60%), marketing and content creation (54%), and reporting and process automation (43%), highlighting the growing role the technology is playing in supporting both operational efficiency and client service delivery.

However, adoption also raises important legal and regulatory considerations, including data protection, confidentiality, intellectual property and governance.

As AI becomes increasingly embedded within legal practices, firms will need to strike the right balance between innovation and risk management.

Growth remains firmly on the agenda

Despite economic and regulatory headwinds, the survey paints a broadly positive picture of business confidence. More than three quarters of professional services respondents (77%) report having a business plan with actionable goals, demonstrating a continued commitment to growth and long-term success. They are investing in people, technology and succession planning while adapting to a changing business environment.

For legal advisers, the survey provides a timely reminder of the challenges facing owner-managed and privately owned businesses. From tax planning and employment matters to cyber security, governance and regulatory compliance, many of the issues identified will require ongoing legal and strategic support in the years ahead. The findings also underline the importance of law firms remaining commercially agile themselves as they navigate the same economic and workforce pressures affecting their clients.