Survey: legal sector peaked

Survey suggests more uncertain times ahead as firms face increased pressure on costs and potentially flatter income levels. However, trends towards consolidation and increased internationalisation continue while the recruitment market remains tight.

Independent research involving 74% of the top 130 law firms in the UK suggests a more uncertain year ahead for the sector. Over half of participating firms cited the economy as an area of concern; and for the first time in six years, there was a drop in business confidence

The survey was carried out by independent researchers on behalf of Smith & Williamson, the accountancy and professional services firm. Giles Murphy, head of assurance and business services at Smith & Williamson, said:

"Whilst the overall outlook for law firms remains healthy, the market seems to have peaked. Many practices are grappling with increasing costs as they have had to ramp up salaries to get the people they need while also dealing with rising property costs. At the same time, income levels are flattening. Although the percentage changes for costs and revenue may be quite small, the combination of the two can have dramatic implications for profits."

"Those parts of a practice relying on M&As and transaction work look most vulnerable. However, where the business focus is on, for example, litigation, private client, arbitration or insolvency, people seem less concerned as these areas are traditionally less sensitive to fluctuations in the economy and historically in some areas have benefited from a downturn."

[The survey was carried out in late 2007, when 51% of respondents considered the economy an area of concern. At the end of 2006, just 17% considered the economy a concern].

Consolidation is set to continue, though at reduced rate

Despite any unease about the future for the legal sector, about 9/10 of participants expect to see the level of merger activity increase or remain the same in the year ahead. However about 10% anticipate the rate to fall.

Although this is a small minority, it is an increase since the previous survey (late 2006) when only 2% expected to see a fall in merger activity.

"The trend towards increased consolidation seems to be continuing as a third of those firms who took part in the research admitted that they were actively seeking a merger or acquisition at the time of the survey. The main motivating factors are to forge links with a firm with complementary areas of activity, to grow the client base and as a means to develop specific sectors. Whilst these were all considered of equal importance, merging as a means to achieve greater profits was secondary.

"Conversely, cultural issues remain definitely the greatest area of potential difficulty when considering a merger and a resounding 9/10 said this was the main bar to a successful merger."

'War for talent' is high on the agenda The need to recruit and retain quality staff continues to be a major issue for law firms and this was cited as an area of concern by just over half of all participants, making it the most frequently mentioned difficulty facing individual firms over the next 12 months.

"The problem is primarily a lack of talented people rather than the lack of numbers, and this pressure on recruitment tends to force up payroll overheads. For those firms who have been investing in new talent, the economic uncertainty could not have come at a worse time."

Internationalisation continues and more firms now have overseas office

77% of those firms interviewed provide international services (2006, 74%) and an increasing proportion of firms have a branch office overseas. Just over half (51%) of respondents said they have an overseas office while the equivalent figure was just 38% in the previous year. Other means by which firms provide international services are via an associated firm (72%), via a local firm (65%) and from the UK office (59%).

About two thirds of firms believe that the European market represents increased opportunities, but almost a third (30%) think it will mean greater competition for the provision of legal services. In the previous year, people were more confident about the lack of competition from European markets and only 10% thought it would mean more competition.

Two thirds (60%) of participants think that the role of US law firms will continue to increase, and this will happen mainly through merger and acquisition of UK firms, but also as a result of US firms setting up local offices.

Details of the survey Senior decision makers (managing partners or financial directors) from 96 law firms were interviewed as part of Smith & Williamson's 13th annual survey into the professions. The survey was carried out by independent research company, Randolph Watson.

The size of the law firms who took part: 50+ partners - 68 practices 26-49 partners - 17 practices 11-25 partners - 7 practices 1-10 partners - 4 practices

For further information:

Giles Murphy, head of assurance and business services

tel 020 7131 4369
email: giles.murphy@smith.williamson.co.uk

Press queries:

Kate Harrison 020 7131 4228
Layisha Laypang 020 7131 4550

Disclaimer

By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.

Notes to editor

Smith & Williamson is an independent professional and financial services group employing over 1,400 people. The group is a leading provider of investment management, financial advisory and accountancy services to private clients, professional practices and mid-to-large corporates. The group operates from offices in London, Belfast, Bristol, Glasgow, Guildford, Maidstone, Salisbury, Southampton, and Worcester.

Smith & Williamson Limited Regulated by the Institute of Chartered Accountants in England and Wales for a range of investment business activities. A member of Nexia International, a worldwide network of independent accounting firms.

Nexia Smith & Williamson Audit Limited Registered to carry on audit work and regulated by the Institute of Chartered Accountants in England and Wales for a range of investment business activities. A member of Nexia International.