Fear of complacency should drive regional firms' growth

Regional firms showed impressive growth last year but they must now avoid complacency and embrace the digital age or watch their revenues fall, research suggests.

The latest Law Firm Benchmarking report from accountancy firm Crowe Clark Whitehill's (CCW) has found that one in three regional firms experienced growth of over 10 per cent in their last financial year, compared to just one in four of their City counterparts.

Overall, a similar number of firms in and outside of the Big Smoke saw their revenues and profit per equity partner (PEP) grow. With PEP rising by over 10 per cent, regional partners took home up to £184,000 while those in the City collected £528,000.

The stream of positive figures should be cause for celebration but taking off the rose-tinted spectacles reveals a less positive picture. While an impressive 41 per cent of firms that saw revenues increase, grew by more than 10 per cent, this was short of the 52 per cent last year and the 58 per cent in 2014. More worryingly, one in five regional firms saw revenue fall last year, up from 17 per cent in 2015 and 15 per cent in 2014.

Smaller firms were hit the hardest, with 30 per cent of firms with revenues of less than £10m seeing PEP fall. Firms with revenues between £10m and £20m experienced the best results, with nearly 70 per cent increasing PEP by more than 10 per cent.

Commenting on the findings, Louis Baker, head of professional practices at CCW, said: 'It is encouraging to see that growth has been steady if not spectacular for both regional and City firms, with regional firms reporting stronger rates of growth.

'The challenge now will be to maintain this growth over the next 12 months: the results paint a picture of an increasingly competitive marketplace, with firms willing to adapt pulling ahead of firms who are less change-ready.'

EU referendum

The accountancy firm recorded the figures before the EU referendum and attributes the drop in revenues to the uncertainty ahead of the Leave vote, which came just before many law firms' financial year end. But have firms been impacted since?

For Ian Liddle, managing partner at North West firm Farleys, it remains business as usual: 'From our perspective, the property market remains buoyant '“ rumours are flying around that London may have been adversely affected but it hasn't had an impact on the North West market.

'Corporate deals also remain steady '“ our clients who export have understandably seen an increase in business as the post Brexit impact of the pound falling in value triggered significant orders from abroad. We have seen no adverse impact and until something actually happens '“ triggering article 50 '“ I can't see anything changing.'

Jonathan Agar, chief executive officer at Birketts, concurred: 'We haven't seen any definitive trends as yet, but much like the general economy, July was a 'pause for thought' and August appeared to be back to normal. External discussions held recently suggest that confidence is beginning to return.'

Digital challenge

Looking ahead, Baker believes the stable cash flow discipline shown by regional firms last year is encouraging. Although the number of work in progress days remained unchanged from 2015 at 61, debtor days decreased from 54 to 52.

'The good news is that lock-up days have remained relatively consistent for the second successive year, signalling more focus on cash-flow discipline. This discipline will be more important than ever in a climate characterised by uncertainty and we would urge firms with lock-up issues to take action immediately.'

Regional firms (48 per cent) have again identified recruiting affordable, high-quality personnel as the biggest challenge to their future success. Though a rise in the number of fee-earners was attributed to increased revenue, fees per fee-earner remained at around £123,000.

However, acquisitions and lateral hires was found to be only the third most important area firms believe they should be investing in. Technology (43 per cent) tops the agenda, followed by property (25 per cent).

These findings contrast from a separate report recently published by Fox Williams, which found that team poaching was the second favourite growth strategy (71 per cent) by members of the Top 200 firms after investment in technology (83 per cent).

Automation is widely regarded as holding the key to the future success of law firms. The market report from Fox Williams found that two in five firms had invested more than £100,000 in the last 12 months to commoditise aspects of legal work.

Writing in Solicitors Journal this month, solicitor James Quinn outlined the benefits of precedent automation to a firm's profitability, efficiency, and risk management. Quinn suggested this could free up fee earners, creating greater opportunity for delegation to junior, lower-cost fee earners, which could lead to a reduction in overheads.

This year's MHA Legal Benchmarking Report also found that IT held the key to future profits. In 2015, firms' spending ranged from 1 to 2 per cent of fee income while spending on business premises running costs varied between 6 and 13 per cent.

Karen Hain, MHA's head of professional practices, said IT investment could aid working procedures to reduce premises costs. She also suggested firms should review their funding structures to prepare for times when additional banking funding may be restricted.

Returning to the CCW report, four in five regional firms currently finance their practices through partner capital and long-term loans, while many rely on bank overdrafts (57 per cent) or short-term loans (46 per cent). Nearly two-thirds (61 per cent) of firms hope to continue lending from their current bank with less emphasis set to be placed on new partners and principals (43 per cent).

Remarkably, marketing was not considered an important investment. If firms are content with their existing client base or cannot afford to invest, cross selling may be a viable alternative. For those that have the financial capacity, an effective marketing plan is imperative and may include updating the brand or exploring digital marketing.

If regional firms wish to match the growth of their City rivals, or at the very least avoid that sinking feeling, they must quickly adapt to the demands of the current market and prepare diligently for the future.

Matthew Rogers is a legal reporter at Solicitors Journal @sportslawmatt matthew.rogers@solicitorsjournal.co.uk