Technology and talent retention have been identified as two of the main challenges facing law firms, according to research from professional services firm Smith & Williamson – findings that are backed up by new Law Society data which suggests the profession could lose up to 20% of jobs as a result of new technology.

Smith & Williamson's annual law firm survey found that more than half (51%) of law firm respondents now pinpoint the adoption of new technology as one of the biggest challenges facing them over the next two to three years.

With artificial intelligence (AI) forcing firms to look at how they structure their operations, they are becoming increasingly aware of the threat that this technology poses, as well as the opportunities. As a result, respondents ranked technology as the second biggest risk they face this year, compared with sixth biggest risk last year.

Smith & Williamson professional practices head Giles Murphy (pictured) said: "What is interesting is that a quarter of people see AI as an issue – in the past, technology challenges have been been focused on efficiency of service delivery, but AI is about changing the process of service delivery and people are now recognising that threat."

These concerns tally with new research from the Law Society, which predicts a gradual reduction in total employment in the legal services sector as a result of automation and AI, alongside an associated increase in productivity.

The research predicts that as many as 5,000 jobs could go in England and Wales by 2025, with as many as 20% of jobs lost by 2038.

With fee income per lawyer stagnating in recent years, Murphy urges firms to use AI and automation as an opportunity to restructure their business to drive up productivity figures in a way that has not yet happened.

He said: "You would expect with more technology that firms would all be more efficient. But analysis of firms' accounts shows people costs have been increasing at the same rate as income growth, so any gains are being passed onto clients without firms benefiting. But that is where AI really comes to the fore – it can change service delivery and cut costs for firms."

Smith & Williamson's survey of the top 200 law firms found retaining talent remains the number one issue facing respondents, with nearly three quarters (72%) of respondents placing it in the top spot.

Brexit was, unsurprisingly, also identified as a risk to firms' business by nearly two thirds of respondents but, despite this, business confidence in the short term is high – with more than 90% of respondents feeling positive about the next 12 months. In the longer term, 77% of respondents admitted to concerns about activity levels holding up.

Despite their fears about Brexit, less than a quarter of the law firm leaders and CFOs taking part in Smith & Williamson's survey said they had put in place a strategic plan to deal with the implications of Brexit.

Murphy concluded: "Given the challenges of Brexit, I'm surprised confidence is as high as it is – it is the same as in 2005-06. What is concerning is that most firms said they have not yet put in place a strategy plan to look at the full implications of Brexit. Even if they don't know what to do, doing nothing is not the right answer."