The Perfect Storm
The legal sector is undergoing an unprecedented period of change. Never before has the legal services market been impacted by so many issues all at the same time – many have referred to this as the perfect storm.
The Legal Services Act
Full external ownership of law firms will be permitted from 6 October 2011, subject to the SRA being in a position to regulate them. Some firms are gearing up to float and use that as a springboard to act as a consolidator. Private equity houses are interested in investing in law firms and consolidators. Membership organisations are well placed to offer legal services to their members. New entrants to the market are likely to be household names with large marketing budgets. They will aim to acquire work on a large scale, operating on low profit margins. They are likely to concentrate initially on high volume, low value work types that they believe can be commoditised. New alliances are being launched with the aim of building recognised national brands for lawyers to compete with the new entrants.
Legal Aid Reform
The Legal Services Commission is looking to reduce the number of legal aid suppliers and move towards best value tendering. This may lead to work being concentrated on the larger providers. Proposals are also in place to remove certain work types from the scope of legal aid.
Personal Injury Reform
Proposals are in place to extend the range of fixed fee fast track cases, cap success fees and effectively remove after the event insurance. The proposals may result in fewer claims and reduced fees for lawyers.
Difficult Trading Conditions
Transactional work in particular has reduced. Other practice areas that rely on transactions are becoming more difficult to complete. Redundancies have been made, but potentially not to a level that reflects the reduced workloads. Whilst benchmark profits per partner have been reduced as firms still need to cover fixed overheads, cash-flow has been impacted to a greater degree as matters are taking longer to complete and payment terms are extending. The cost of obtaining finance from the banks has increased.
The SRA is moving away from a rigid rule-based regulatory approach towards a more principles-based, outcomes focused form of regulation. This is tied in with the Legal Services Act reforms and firms will be expected to re-evaluate their processes as a result.
Mergers & Acquisitions
After a lull in law firm M&A activity during the credit crunch and recession, activity is now picking up. All of the issues outlined above are combining to push the market towards consolidation.
As a result of all of these factors, many law firms are reviewing the way that they operate. They are looking to reduce fixed overheads to perform in the most efficient manner possible and to be able to respond quickly to the challenges that they are facing. This includes outsourcing legal processes, support services and their cost draftsmen.
Armstrong Watson, Specialist Accountants for the Legal Profession
In response to these issues and opportunities, Armstrong Watson has developed a specialist nationwide team to focus exclusively on the legal profession and to understand the issues that the legal sector is facing.
Contact Andy Poole, Legal Sector Director at Armstrong Watson to arrange a meeting on 01228 690200 or by email firstname.lastname@example.org