Professional Practices News - Changing Times, December 2007

Against a backdrop of wavering business confidence across the professions, we look at some of the complexities of keeping firms' and partners' finances in order.

PROFESSIONAL PRACTICES SURVEY 2007 - CHANGING TIMES

Tracing the trends and attitudes within the legal and property sectors, Simon Mabey analyses the results of our 13th annual survey of professional practices.

This year, our survey explored changing outlooks within professional practices. And, according to interviews with senior decision makers from 109 firms, business confidence is down for the first time in six years.

Our survey also suggests that firms face increased competition to recruit and retain quality staff. Perhaps as a result of this, there is significant interest in acquiring established teams from other firms.

Another trend appears to be a growing acceptance of the need for external capital - indeed the survey reveals that lawyers, as well as property firms, now see an Initial Public Offering as a means to raise such funds. With the introduction of the Legal Services Act, many in the legal sector are keen to see who will be the first to take advantage of the relaxation in the rules. Giles Murphy explores this further in the next article.

Fall in business confidence

While the vast majority (87%) of respondents are still 'very or reasonably confident' about the business outlook for the year ahead, this is a marked fall compared to last year when 98% said they were 'very or reasonably confident'. As if to confirm this mood, participants report greater competition to win new work and difficulty developing new areas of business. Similarly, clients are putting more pressure on fees.

Vulnerable to the downturn

This year the survey took place as major concerns about the US sub-prime mortgage crisis and the consequent 'credit crunch' began to emerge in the UK; this backdrop undoubtedly influenced attitudes to the prevailing economic climate.

In considering which areas of business are most likely to be affected by an economic slump, it's fair to say that, among law firms, those relying on mergers and acquisitions and transaction work appear most vulnerable. In comparison, where the focus is on litigation, private clients, arbitration or insolvency, law firms are less concerned about a downturn.

"Business confidence is down for the first time in six years"

The war for talent continues

The need to recruit and retain quality staff continues to be a major issue for both legal and property firms. The primary problem appears to be a lack of talented people, rather than lack of numbers, and this is contributing to rising overheads. Indeed, about half of all participants cited this as an area of concern, making it the most frequently mentioned difficulty facing individual firms over the next year.

Team acquisitions on the rise

As part of the drive to recruit the best talent and find new areas of profitable work, firms continually look to develop new practice areas or acquire teams from other businesses. In fact, almost two-thirds of firms (60%) reported that they had acquired a new team in the past two years. Of those firms that made such acquisitions, teams involved in real estate appeared most sought after, while those focusing on company commercial work or litigation polled joint second.

In general, newly acquired teams are soon profitable: 75% of those teams that changed hands were in profit within two years. It's notable that most teams were fairly small. For instance, 48% of acquired teams included 2-5 people and 28% of teams included 6-10 people, whereas 15% counted from 11-20 individuals and only 6% contained over 20 new staff.

Confirming this trend towards team acquisitions, over three-quarters of firms (80%) admitted that they had either approached (or been approached by) another firm with a view to a potential merger or acquisition in the past two years. The equivalent figure last year was just 70%.

US in the UK

About half of the survey's participants believe US firms will have an increasing role in the UK. Around a quarter of respondents believe that a US firm might try to raise funds through its UK entity, possibly by taking advantage of the new opportunities under the Legal Services Act. However, with many US firms now well established in London, participants no longer see them as a threat to their individual business.

PROFESSIONAL PRACTICES SURVEY 2007 - AN APPETITE FOR CAPITAL

Following the changes introduced in the Legal Services Act, Giles Murphy looks at what Smith & Williamson's most recent survey tells us about law firms' attitude towards external capital.

The opportunities to access external capital as an alternative source of funding for legal practices, as allowed by the Legal Services Act, seem to be gathering significant interest in the legal market, according to our professional practices survey.

Of the firms we surveyed, 57% believe that professional firms will seek to increase their financial resources through the use of private equity. This is a surprisingly high figure given that the objectives of private equity do not necessarily coincide with those of legal practices. Traditionally, we have not seen significant long-term use of private equity in 'people businesses'.

New opportunities

Asked how the market would react to the Legal Services Act, half of those surveyed expect law firms to take advantage of the provisions of the Act and list their equity on a UK stock exchange. We also asked firms about their own plans. Of those surveyed, 25% said they are looking to raise external capital in the next two to five years. Out of these firms, 52% said they would consider using private equity - perhaps as a stepping stone to a listing. A third of the firms looking to raise external capital in the next two to five years indicated that they would consider listing their equity on a stock exchange.

There is an assumption in the legal profession that the first wave of law firms listing on a UK stock exchange will be from the larger UK firms. However, the recent listing of Slater & Gordon in Australia (a small law firm that would not rank within the top 80 in the UK) suggests this may not necessarily be the case. Our survey appears to support this view, since the majority of firms (77%) are planning to raise less than £20m - a relatively modest sum.

An alternative interpretation of the relatively small sums that firms expect to raise is that listing is seen as a way of realising value in the firm and creating liquidity in the...