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UK law firm business confidence reaches eight-year high

But rising 'economic dangers' threaten to destabilise growth plans 

18 November 2014

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By Manju Manglani, Editor (@ManjuManglani)

Investment in growth is a strong strategic priority for the UK's top-250 law firms, a market survey has found.

Many are planning to invest in technology, new service lines and office space in the coming year.

Business confidence in the legal sector has reached its highest point since 2006, despite growing pressure on fees and profitability.

"The only time we have seen business confidence surpassing the current level was in 2006, when it reached 98%, just when the economy was peaking before the onset of the recession," commented Giles Murphy, head of professional practices at Smith & Williamson, which conducted the research.

"But while firms are scaling up and planning to invest - as demonstrated by the two thirds (69%) of practices who are planning to increase investment in IT, almost a half (42%) who are planning to set up new service lines, just under a third (29%) expecting to take on new office space - there are a raft of economic dangers on the horizon."

These dangers include the prospect of rising interest rates, renewed uncertainty regarding the UK's role within Europe, signs of cooling in the UK property market and potential political uncertainty following the general election in 2015, he said.

"Managing cashflow is an issue which firms cite each year, but I fear that this could take on renewed importance in the coming months given this sobering backdrop. Besides, the period between now and the end of January is generally when law firms face their greatest financial pinch points."

Ninety-six per cent of the firms which took part in research stated they are confident about the year ahead.

However, three quarters of respondents also said that competitive challenges have risen since last year, with pressure on fees posing the greatest challenge. Maintaining profitability was highlighted as the second most pressing issue.

In addition, almost two thirds said they are asking their partners to invest more in the business following the recent changes to the tax regime for limited liability partnerships.

Only a fifth (22 per cent) said they have accepted that some of their partners will be treated as employees for income tax purposes under the new rules.

"With LLP status now the norm among professional practice firms, we are seeing significant tightening of the tax rules," said Murphy.

"With the possibility of further changes, this could alter the way firms are structured, with a consequential impact on the way partners are remunerated, bringing long-term implications for career progression and succession planning."

Restructuring of the UK legal market

The research highlighted that the UK legal market has undergone significant change in recent years.

In 1994, the combined gross fee income of the top ten firms (at just under £1 billion) was less than that achieved by any one of today's top seven firms (£1.1 billion upwards).

And, as recently as 2009, the UK's top-tier law firms included Halliwells, Cobbetts, Manches, Dawsons and Barlow Lyde & Gilbert, but these names no longer feature in the market.

Expectations of mergers and acquisitions have also shifted within the legal sector, according to Smith & Williamson's research.

In 1996, 63 per cent of firms predicted M&A activity would increase and, while this dipped to just 36 per cent in 2002, it rebounded to a high point of 84 per cent in 2012.

Multidisciplinary practices were highlighted as a growing trend, particularly in 2006, when 78 per cent of respondents expected firms from different professions to join forces.

Changes have also been made to law firms' business structures over the years.

In 1996, 38 per cent of firms were considering how to limit liability, but it was not until 2002 that a respondent said it had converted to an LLP structure.

By 2005, a third of respondent firms were LLPs; this rose steadily so that, by 2014, 84 per cent had become LLPs.

A further 12 per cent retain the traditional partnership model, while only five per cent have a company or combination structure.

The 20th annual survey received responses from 98 top-250 UK law firms, of which 18 are in the top 50 and 28 firms are in the top 50 to top-100 bracket.




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