By Daniel Hunter
The UK legal sector has been facing a series of challenges in recent years, which, according to Duff & Phelps, has resulted in a number of high profile restructuring and mergers, with some firms entering Administration.
The recent merger of Pennington’s with Manches and the collapse this year of national law firm Cobbetts and US firm Dewey Leboeuf, are illustrative of widespread financial pressures on law firms big and small.
“Many law firms have had to find replacement professional indemnity insurance (PII) after the Latvian authorities recently withdrew the operating licences from insurer Balva, which has previously been a source of PII for many UK law firms,” stated Jeremy Bennett, a partner at Duff & Phelps, a leading global financial advisory and investment banking firm.
“For many small and medium sized law firms there is now a real survival risk. The key to whether these firms survive in the future will be how they develop a sustainable business model and adapt to changing market focus.”
Law firms typically plan for the annual October 1st deadline for their PII renewals, which will have a natural impact on cash flow. Many turn to their existing lenders to secure funding for this expense over the year. However, some have had to consider applying for short term funding to meet their financial obligations. It has recently been reported that over 170 law firms have not secured PII for the current year.
“Factoring in provisions around PII, together with other liabilities such as quarterly rent charges and increased Solicitors Regulation Authority (SRA) regulatory requirements, it is not surprising that industry observers predict more failures in the sector, at least in the short term,” continued Jeremy.
The restructuring and turnaround of a law firm not only involves the practice, whether it be a limited liability company, LLP or traditional partnership, but also the individual partners or members themselves, who will have professional and partnership loans in use to fund their firms’ capital requirements.”
Recent legislative changes allowed the introduction of Alternative Business Structures (ABS), which has enabled investment by entities outside of the legal profession into legal practices.
According to the SRA, there are currently more than 180 registered ABS, which are licensed to the organisation. The potential impact of ABS on the legal sector should not be underestimated, given the size of the market.
“Once investment into the legal sector reaches critical mass, it is likely we will see a polarisation from which only two types of practices will survive in the long term: highly efficient practices selling commoditised law at a price set by the prevailing market conditions, and prestige practices selling bespoke legal advice for which they are able to dictate the price,” continued Jeremy.
“Delivering more legal service at less cost is a key value proposition and one likely to become increasingly important to the clients of small and mid sized legal practices. Indeed, it is expected that fixed fee offerings will become the norm, as small and medium sized practices compete for work.”
Pressure on fees has more recently intensified as a result of the Jackson reforms, which introduced Conditional Fee Agreements and Damages Based Agreements or DBAs. A solicitor’s ‘success fee’ for winning a case, usually personal injury based, is deducted from the client’s damages award. The client, therefore, has a vested interest in restricting potential success fees and will no doubt shop around.
“UK lawyers should not dismiss the rise of foreign legal practices and the growth of outsourcing legal services. The outsourcing trend is aided by the rapid advancements in IT which have made it easier, more cost effective and more secure to transact on a global basis,” continued Jeremy.
The legal profession has recently seen a growth in insolvencies and law firms are facing difficult financial challenges. Lawyers must be quick to identify and take advantage of the opportunities that these challenges can provide.
“If they do not, then the implications for both the law firm itself and the individual members or partners could be severe. Taking steps now to develop a sustainable business model for the future is essential,” concluded Jeremy.
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