Legal sector: survey reveals plummeting business confidence
Only half of the UK's top law firms are confident about the year ahead
Independent research involving 102 leading law firms - of which three quarters are part of the UK's Legal 100 - reveals that confidence has plummeted. In 2007, approximately nine out of ten of respondents were reasonably or very confident about the next twelve months, whereas this year's survey reveals that only half of those polled are reasonably or very confident. Moreover, those who are not confident about the future soared to 43% of respondents in 2008, from just 9% in 2007.
Other key findings include:
- 3 in 4 respondents see the economy as a key issue for the legal sector
- 6 in 10 participants expect to see an increase in mergers in the sector
- Almost 8 in 10 participants provide international services
- Middle East is seen as the overseas territory with most potential
Figures below compare business confidence within the legal sector for 2006, 2007 and 2008.
How confident are you about a positive business outlook for the legal sector over the next 12 months?
| 2006 | 2007 | 2008 | |
| Very confident | 31% | 20% | 4% |
| Reasonably confident | 67% | 69% | 46% |
| Not very confident | 1% | 9% | 40% |
| Not at all confident | - | - | 3% |
| Other / don't know | 1% | 2% | 7% |
| 100% | 100% | 100% |
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:
"Last year's results gave the first hint that confidence was starting to wane, but this trend has dramatically increased this year. The service sector has been one of the success stories of the UK economy over the last few years, but with only half of the firms surveyed saying they are confident about the next 12 months, we are undoubtedly entering a different phase of the economic cycle with a more uncertain future for the service sector."
London vs provincial firms
On further analysis, the provincial firms appear to be more pessimistic about the business outlook than London firms as 48% of regional firms admitted to being not confident, compared to just 40% of London firms. Similarly 53% of London-based practices are reasonably or very confident about the future, compared to just 45% of provincial firms.
2008: How confident are you about a positive business outlook for the legal sector over the next 12 months?
| Non-London | London | |
| Very confident | 2% | 5% |
| Reasonably confident | 43% | 48% |
| Not very confident | 43% | 38% |
| Not at all confident | 5% | 2% |
| Other / don't know | 7% | 7% |
| 100% | 100% |
The survey also explored business issues facing the legal sector. Unsurprisingly, the economy is top of the agenda, as three out of four (76%) of respondents consider it a key issue. According to the survey, the second most important issue facing the sector relates to fee income, with approximately one in five (17%) commenting that it as an issue. However, for the first time since this survey was started fourteen years ago, ‘the management of a downturn' was mentioned, and almost one in ten respondents (7%) feel this to be an issue.
"The fact that 3 in every 4 law firms cited the economy as a key issue demonstrates the massive uncertainty that the current economic environment is causing and the focus that firms are placing on current trading rather than arguably more significant strategic issues, such as the Legal Services Act," continued Giles.
Consolidation to rise
However, despite unease about the future for the legal sector, six out of ten of the overall sample group expect to see the level of merger activity increase. The equivalent figure last year was just five in ten. Interestingly, in 2008, three in four of the largest firms (those with over 100 partners) expect merger activity to continue growing in the year ahead, and none of this group expects it to fall. However, last year, just under half (43%) of the largest firms anticipated an increase in merger activity. Said Giles:
"While the economy has been booming, the anticipated level of merger activity has not been forthcoming and yet as the economy falls, our survey suggests that consolidation is expected to increase. This highlights that some practices may look at defensive mergers in the year ahead. In reality, when firms are doing well, the desire to do even better is often not strong enough to outweigh any perceived risks surrounding merger, such as cultural differences, which this year's and previous surveys have shown to be the area of greatest potential difficulty in undertaking a merger.
"However, in the current market, management boards may feel the need to take action to deal with underperformance outweighs the problem of matching cultures. In good times, merging two strong complementary practices can build ‘super firms'. Clearly, the risk of merger in the current market is that the opposite occurs."
| 2008 | 2007 | |
| Increase | 60% | 49% |
| Remain the same | 29% | 43% |
| Decrease | 10% | 7% |
| Don't know | 1% | 1% |
| 100% | 100% |
Overseas opportunities
Notwithstanding this decline in confidence, the survey reveals that the legal market continues to operate at a global level. 78% of respondents provide international services and 61% of those headquartered in London have an overseas branch or office, compared to only 10% of non-London firms.
When asked which overseas market provides the best opportunities for expansion, the Middle East was considered to offer the most potential, followed by China, India and the Far East. In order to make the most of these opportunities, 60% of respondents believe it has led to an increase in ‘best friends' alliances, while 15% believe it has meant a rise in mergers between UK and Chinese/Indian/Far East firms.
Which overseas territories provide the greatest opportunities? (Respondents were asked to rank markets in order of importance).
- Middle East
- China
- India
- Far East
- North America
- Western Europe inc. Scandinavia
In contrast, Smith & Williamson's survey suggests that lawyers consider that the role of US firms in the UK has reached a plateau. Indeed, 52% of participants report that they do not envisage any further development in the role of US firms in the UK, while remaining respondents were split equally between those who anticipate further growth and those who anticipate a decline in their role in the UK.
Details of the survey Senior decision makers (managing partners or financial directors) from 102 law firms were interviewed during September 2008 as part of Smith & Williamson's 14th annual survey into the professions.
The survey was carried out by independent research company, Randolph Watson.
The size of the law firms which took part:
- 100+ partners - 28 practices
- 50-99 partners - 31 practices
- 26-49 partners - 25 practices
- 11-25 partners - 14 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
Jess Koslow 020 7131 4264
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.
Note to editors
Smith & Williamson is an independent professional and financial services group employing over 1,500 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, Birmingham, Bristol, Dublin, Glasgow, Guildford, Maidstone, Salisbury, Southampton, and Worcester.
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