Why small law firms are outpacing larger rivals in the recovery

The old saw about a rising tide lifting all boats has proved a metaphor for all seasons this year.

Coalition politicians have frequently used it to extol the benefits being delivered by the economic recovery. In his party conference speech, Labour leader Ed Miliband quipped ?that the rising tide of growth only seemed to be raising? "the yachts".

Yet for the legal profession, I believe it's a case of the small speedboats rising up and leaving luxury yachts ?bobbing listlessly.

Every year my accountancy firm polls law firms across London and the south-east in an attempt to gauge sentiment and progress in the profession.

In 2013, we saw a marked divergence between small and large law firms. Many small firms grew their business by 10 per cent in the year, more than double the average growth seen across the sector. The best performing small firms boosted their profits by 17 per cent over the 12 months.

There are a number of reasons for this: from the areas of law favoured by smaller firms, the way they market themselves and their approach to growth.

Building up

With buyer confidence rocketing, the property market has been booming in many parts of Britain for much of 2013. Many high street solicitors rely on conveyancing for a steady stream of income. This work dried up following the financial crisis, when property transactions plummeted.

But with the market now back in overdrive, small firms with conveyancing arms that weathered the storm are reaping the dividends. Many fell further (in proportionate terms) than the larger, highly diversified firms. Now the good times are back for small-firm conveyancing, their hunger is greater, and so too is their rate of growth.

Other practice areas have seen a surge in work with the return of strong consumer and business confidence. As a rule, it is often the smartest and most entrepreneurial SME law firms who have capitalised best on that confidence.

It's telling that a legal sector survey published by Deloitte in December found that Britain's largest law firms had grown ?fee income almost exclusively by hiking their fees, while ?many mid-tier firms had done so by an increase in ?fee-earner headcount.

David beats Goliath

This difference in approach ?hints at a greater desire among SME players to invest in and grow the firm, rather than just squeeze more money out of existing clients.

While big firms are traditionally very good at generating additional revenue - often by selling additional services to existing clients - smaller firms' greater agility and more flexible approach to marketing often makes it easier for them to pick up new clients quickly. This frequently gives them the edge over larger firms.

The British economy is ?heavily geared towards SMEs - together they account for ?48 per cent of private sector turnover. While many SMEs were hit very hard by the recession, the best have emerged from the downturn as very lean and efficient organisations.

These businesses are a rich source of potential clients for ?the most savvy smaller law firms. When looking for legal advice, the owner of a successful SME is likely to choose a firm that reflects their own attitude: small, dynamic and competitively priced.

Trouble ahead

However, it's not all rosy for small firms. Those who rely on legal aid for the bulk of their fees could easily be pushed out of business by government plans to cut legal aid fees by up to 30 per cent next year. A lot of criminal solicitors taking part in yesterday's mass walk-out in protest at the proposals will have been from smaller companies.

Many large firms have the luxury of greater diversification. While this safety net gives them more protection in bad times, it may also be hampering them now growth is back. It's harder for a large and complex organisation to respond as quickly and effectively to rising demand than it is for a smaller, leaner firm.

While the luxury yachts are still fumbling with their sails, many of the speedboats are already roaring out to sea. SJ

 

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Paul Beber is corporate finance partner at HW Fisher 

www.hwfisher.co.uk

 

 

 

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