Professional Practices News. Confidence Takes A Nose Dive, Winter 2008/09

Professional Practices Survey 2008/09 - Business Confidence

Plummets

Simon Mabey analyses the trends and attitudes revealed in our

14th annual survey of professional practices.

This year, 126 professional practices, including lawyers,

property consultants and patent agents, took part in our annual

survey. The most striking finding is the fall in business

confidence. Last year's results gave the first hint that

confidence was starting to wane, but this trend is dramatically

more marked this year. The service sector has been one of the

success stories of the UK economy over the last few years, but with

only a little over half of the firms surveyed saying they are

confident about the next 12 months, we are undoubtedly entering a

more difficult phase of the economic cycle. Moreover, the

percentage of respondents who are not confident about the future

soared to 42%, from just 11% in 2007/08.

Fig 1: Business outlook comparison for 2006/07, 2007/08 and

2008/09

Furthermore, we conducted our survey just before the period of

market volatility which followed the collapse of a number of

international banks and financial institutions. Therefore, our

results could well under-represent the level of uncertainty

prevalent across the sector.

The survey also explored business issues facing professional

practices. Unsurprisingly, the economy is top of the agenda; almost

four in five (77%) of respondents consider it a key issue.

According to the results, the second most important issue facing

the sector relates to fee income. However, with only one in six

(14%) citing this as an issue, it appears that concern about fee

income is dwarfed by that about the economy. For the first time

since this survey was started fourteen years ago, 'the

management of a downturn' was mentioned – 6% feel

this to be a concern.

Increased merger activity ahead

Despite unease about the sector's future, 60% of the

respondents expect to see the level of merger activity increase.

The equivalent figure last year was less than 44%.

It would seem, therefore, that while the economy has been

booming, the anticipated level of merger activity has not

materialised and, as the economy falls, consolidation is expected

to increase. This suggests that some practices may look at

defensive mergers in the year ahead.

Indeed, approximately one in five of our respondents admitted

they were seeking a merger or acquisition at the time of the

survey, of which about a third anticipated completion within the

next three months. And, while half of these tie-ups are likely to

add only 10% or less to revenue, a quarter may add as much as 50%

to earnings. This appears to confirm that, as the economy

deteriorates, we can expect to see further consolidation across the

professions.

Firms take a risk when merging: in good times, merging two

strong, complementary practices can build a 'super firm';

in bad times the opposite can occur. However, in the current

market, the need to deal with underperformance may outweigh any

potential problems of aligning cultures.

Team acquisitions still of interest

Interest in acquiring established teams from other practices

appears to be even higher up the agenda than in 2007/08. More than

82% of firms admitted that they would consider this, whereas last

year the figure was 77%. This trend appears to be most prevalent

among law firms, where 84% said they would buy a team from another

organisation. The equivalent figure for property firms is 73% and

just 69% for patent agents. Not surprisingly, it is the larger

practices which are most acquisitive.

Furthermore, just over half of firms (54%) have bought a team in

the last two years, three-quarters of which have finalised the deal

in the last year. Both London and provincial firms seem to be

equally involved in such acquisitions.

When looking at practice areas that have changed hands, real

estate is the most common, closely followed by litigation and

company commercial. The major attraction of buying

'ready-made' teams appears to be profitability. Almost

threequarters of those who acquired a team reported that it was

profitable within two years, the majority of which were profitable

within the first year of trading. However, acquisitions and mergers

are also seen as an excellent means of developing specific sectors

and growing the client base.

Most teams that changed hands comprised 5 fee earners or less,

while only 10% had more than 20 fee earners.

Fig 2: Acquired team size (in terms of fee earners)

Looking east

Notwithstanding the decline in business confidence, our survey

results reveal that the professional services market operates

increasingly at a global level, with 81% of respondents providing

international services. The most common route is via an associated

firm or 'best friends' relationship. However, 41% of

respondents who provide international services have a branch office

overseas.

The results indicate, in particular, that there is a trend

towards eastward expansion; respondents consider that the Middle

East offers the most potential, with China and India following

closely behind.

In contrast, lawyers and property specialists consider that the

role of US firms in the UK has reached a plateau. 54% of

participants do not envisage any further development in the role of

US firms in the UK, while the remaining respondents are split

equally between those who anticipate further growth and those who

expect a decline in their role in the UK.

Fig 3: Overseas territories providing the greatest

opportunities

Identifying the need for diversity

For the first time, we asked law firms about their diversity

policies. Judging from our findings, steps are clearly being taken

to introduce greater diversity among partners and staff, with the

larger practices leading the way.

56% of respondents said they have amended their diversity

monitoring systems and introduced more flexible working practices.

Furthermore, 43% have amended, or are reviewing, their recruitment

policy.

PROFESSIONAL PRACTICES SURVEY 2008/09 - DEREGULATION OF THE

LEGAL SECTOR

One year after the Legal Services Act was introduced, interest

in raising external finance continues to grow. Giles Murphy

assesses the likely impact on the legal sector.

Following the introduction of the Legal Services Act (the Act),

we used our annual professional practices survey to explore how the

Act has affected firms' views on external finance.

Given that the Act enables law firms to join forces with other

professionals, a resounding majority (82%) of respondents

anticipate mergers between firms of different disciplines. This is

slightly up on previous years, as the equivalent figure in 2007/08

was 77%, and in 2006/07 was 78%. In order to finance this, 73%

expect that firms will need to raise external capital, whereas last

year the equivalent figure was 66%.

The survey explored when this finance might be raised. 28% of

respondents expect to seek external finance within the next two to

five years. The proportion of respondents who thought it unlikely

that they would raise external capital within the next two to five

years has fallen since 2007/08.

We also explored how external finance will be raised. Although

structured bank finance remains the most likely route, just over

half the respondents looking to raise finance would consider the

private equity/ venture capital route (52%), while 38% would

consider a public listing.

While we expected initial interest in the opportunities that the

Act created, this has scarcely changed over the last 12 months,

despite the worsening economic conditions and the decline in equity

values. This suggests there is a significant minority of the top

100 law firms which is actively pursuing the option of external

equity funding.

However, the realisation that this is not a route simply for

partners to sell out appears to be gaining some traction. The

'opportunity for partners to realise capital value in the

business' has slipped from the third most important reason for

wanting to raise capital to the fourth. The most important reason

remains 'funding the long-term future development of the

firm'.

The survey explored the amounts firms might wish to raise and

while 34% would raise less than £5m, those...

To continue reading

Request your trial

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT