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...
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