The UK's top law firms need to follow the lead of investment banks and take a more brutal approach to underperformance as they fight to maintain market position in the face of growing competition from US firms and legal services providers.

This is the message from RBS' head of legal services James Tsolakis (pictured below right) speaking after last month's publication of the bank's annual legal sector report. The report predicts significant change in the market and potentially uncertain economic conditions.

Tsolakis tells Legal Week: "Firms are still clinging to old-fashioned partnership values, but that's a challenge if you have under-performers in your ranks in an environment where there are too many lawyers.

"There needs to be a shift in culture towards performance-driven benchmarks. Investment banks were all partnerships too, but their evolution has been dramatic compared with law firms. This can extend to restructuring – law firms are still reluctant to make the brutal people decisions needed to deliver the right economic results."

Dealing with under-performance is increasingly important for UK firms given the huge amount of competition they face both from new entrants such as the accountants, which are a significant threat on higher volume work, and established players such as US law firms.

The RBS report points out that US firms' strong domestic economy, more targeted approach to international expansion and higher profitability is making it easier for them to crack London than for UK firms to crack the US.

In addition Tsolakis argues that the merit-based remuneration in place at many US firms also makes performance management easier.

He says: "US firms generally do it better. They more proactively manage people according to KPIs and link financial outcomes to performance. They have been successful here but UK firms can't crack their market.

"They are eroding the market share of UK firms at home and we are not getting anything in return. US firms are leading with their chequebooks and poaching good people," says Tsolakis.

The competition is putting increasing pressure on lockstep, with many firms being forced to adjust their remuneration in recent years in order to bring in key US partners. Freshfields is understood to have flexed its lockstep for some of its US hires, while Linklaters is planning to review its partner remuneration once its new management team is in place.

US firms are leading with their chequebooks and poaching good people

Pressure from US firms is only one of the challenges facing UK law firms highlighted by the report. It stresses that firms need to learn how to adapt to the unprecedented economic and political change in the global markets and build distinct brand identities in order to remain successful in an increasingly competitive environment.

The report also highlights cyber security and technology risks as an emerging issue for firms, stating that 64% of law firm respondents to a survey carried out by RBS in September said they planned a major technology upgrade. A fifth admitted to being a victim of a cyber-security attack over the last year.

While none have been of the scale of recent attacks on banks and corporates that have hit the headlines, Tsolakis stresses this is likely to change.

He says: "There's recognition that there are increasing attacks on law firms and that the data they hold makes them hot targets. We're now seeing firms appreciating this threat and seeing IT as a source of competitive advantage."

Other challenges for the sector highlighted by the report include a need to deal with expensive real estate costs. While the development of lower cost business and legal services support centres in cheaper locations outside London will make some difference, firms could go further and redesign their central office space to increase efficiency.

There's recognition that there are increasing cyber attacks on law firms and that the data they hold makes them hot targets

It references research by real estate company CBRE stating that other industries such as management consultancies and accountants all fit more staff into less space than law firms, fitting around 1.25 people into the same desk space as one at a law firm.

All of these difficulties mean there is an opportunity for those firms that take a genuinely innovative approach to investment and fixed costs, as well as under-performance and remuneration models, to stay ahead of the crowd.