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Firms remain optimistic

‘Too many law firms, and more will fail’ says BDO report

Martin Gill BDOScotland’s law firms remain optimistic despite believing that the market is overcrowded and that more will fail this year.

Half revealed they had held merger talks in the past 12 months and almost 70% believe there are too many lawyers.

The findings emerge in a survey by accountants and business advisers BDO, entitled Gearing up for the future.

It found that 88% of firms reported higher fee income in the first half of the current financial year, and 65% stated that they would have higher Profit per Equity Partner (PEP) than the same period last year.

Last year 82% of firms’ recruited staff and 35% of those have increased their headcount by more than 5% whilst 88% report that they will be recruiting additional numbers in the next year.

Martin Gill (pictured), head of BDO in Scotland, said: “These figures reveal a legal sector which is remarkably optimistic and seems to have bounced back from the recession with some force.

“However, countering this optimism remains the view that the market is saturated with 69% of firms believing that there are simply too many lawyers and too many law firms in Scotland.”

Over half of firms (53%) reported that they had held merger talks in the last year with 67% citing a lack of a suitable culture as the main reason for not merging.

This was followed by 33% citing onerous property lease commitments. Three quarters (75%) believe that more mergers with UK national firms will happen in the next 12-18 months and 63% think there will be increased consolidation of mid-tier Scottish firms.

Of more concern is the view by 37% of firms that it is likely or highly likely that more law firms may become insolvent in the coming year. This reflects a much more realistic outlook presumably engendered by some of the shocking insolvencies in the legal sector in recent years.

Mr Gill continued: “It is clear that the legal market believes that there are too many law firms and lawyers chasing too little work and that mergers and even failures are the likely outcomes in the coming year.

“The Scottish market has changed over the last few years and adopted more business-oriented and realistic approaches to operating law firms but there may still be some way to go.”

There are clear signs that Scotland’s legal sector has developed stronger management systems to adapt to the current economic environment.

Almost three quarters (70%) said they had managed partners out of the business with 60% stating they had significantly reduced an equity partner’s interest in the firm and 40% said they had demoted partners from equity to non-equity.

Another reflection of the greater reality to impact the legal profession is in the 69% who believe that the ratio of staff to partners will increase in the coming year. Just 6% state that the ratio of staff to partners will decrease.

The biggest practice management issue is the number of lock-up days with 75% of firms reporting a concern. This is followed by 56% of firms expressing concern over chargeable staff not achieving budgeted billing hours, with 50% reporting that clients are negotiating lower fee levels.

For two thirds of firms (67%) growth is jointly expected to occur in real estate and construction and in the technology and media sectors with food, leisure and hospitality coming third at 47%. Service line growth is expected from dispute resolution/litigation (62.5%); private client work (56%); and intellectual property and technology (50%).

Gill concluded: “This survey reveals an optimistic view of the current state of the legal profession laced with some hard-nosed reality.

“Many firms are clearly doing very well and believe that the coming year will improve whilst also recognising that this is an over subscribed market where the potential for the corporate failure of law practices remains a reality.

“It would have been almost impossible to imagine that law firms would fail a few years ago and yet now over one third of the practices in Scotland believe it will happen in the coming year.

“But the good news is that most firms appear to have set their house in order, are aware of income generating issues and acting appropriately, are addressing the issue of poorly performing equity partners, and are managing their practices more effectively with a greater eye on the bottom line than might have occurred in the past.”

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