By Daniel Hunter

71% of professional services firms report having been in merger or acquisition talks in the past 12 months, according to new research from Deloitte and Winmark.

The survey of more than 40 professional services providers, primarily law firms, also reveals optimism regarding the economic outlook for the coming year, with 74% expecting growth in comparison to 37% last year.

In 2011, 81% of those involved in merger discussions wanted to join with a smaller firm. This year the figure has fallen to 52%, with 24% wishing to embrace businesses of a similar size and another 24% seeking opportunities with larger firms.

“The change in attitude towards merging with bigger competitors only serves to highlight the ‘survival of the fittest’ reality that faces elements of the professional services sector," Jeremy Black, partner at Deloitte’s professional services practice said.

"Previously, most firms favoured amalgamating with a smaller peer, retaining management control and their name. However, in a market where supply continues to outstrip demand, consolidation is both essential, imminent and is forcing some firms to reconsider their approach. Consolidation is one way to expand the client base and also deepen specialist knowledge — whether that is in an industry focus or a practice area.”

Growth from international expansion is also expected, especially in the emerging economies. The report reveals that 30% of managing partners consider the greatest growth opportunity to lie in overseas work, compared with only 17% last year.

However, the route to international growth is likely to be a conservative one, with over half of respondents expecting to expand their global footprint through strategic placement of UK partners, rather than an overseas acquisition.

“The primary focus for leaders of professional services firms for the next 12 months is growth," Alex Wright, Head of Research at Winmark said.

"Seeking out opportunities through better client engagement and international experience are central to this. The crisis in the Euro Zone is however seen as the greatest single threat facing the sector (41% now feel that way), meaning that firms must look to the more challenging emerging markets where the risk and rewards are greater.”

Whilst growth is predicted, it remains moderate in comparison to the increases characteristic of the pre-recession period. Slower rates of growth result in fewer promotion opportunities, meaning the route to partnership is less accessible for many juniors in the profession. This presents law firms with the challenge of finding new ways to keep staff content.

“65% of respondents thought staff morale had fallen in their businesses this year. Managing partners must tackle this," Jeremy Black concluded.

"If promotions are limited, there are alternative ways to improve career prospects for staff and boost morale including training, flexible working and providing individuals with international experience. Firms that can sustain high morale will have an important advantage when trying to achieve coveted, consistent growth.”

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