Our 17th annual survey of the legal sector explores issues and trends affecting law firms and the legal market. This year, 126 of the UK's top 250 law firms took part, including two-thirds of the top 100, along with half of the UK's top 10 firms. Practices were represented by their managing partners, finance directors or similar
Confidence rises
Firms appear to have turned a corner, with business confidence returning to the sector. This year, almost three-quarters of respondents are confident about the year ahead (64% last year), with this rise in optimism supported by a drop in the proportion of those who are not confident. These are the most encouraging results we have received since 2007 and with the economy arguably facing uncertain times again, it suggests that law firms are now better prepared for the challenges ahead.
Key issues facing individual law firms
While the strength of the economy is naturally the overriding issue for both the sector and individual firms, practices are focusing on how to adapt to the changing environment, the performance of the partners and increasing levels of competition.
Running on corporate lines
Firms may operate as LLPs (80% in our survey), but they are increasingly looking to adapt their business structures to enhance the level of cash ultimately received by the partner. Recent rises in both the top rate of income tax and national insurance have resulted in growing interest in strategic tax planning and over half (55%) of participating firms have introduced a service company or are in the process of doing so. A further quarter are looking into this, suggesting that this has become routine practice within just a few years.
While the introduction of a corporate partner or member is considered to be more controversial, over a third of participating firms are looking into this and 10% have organised this change (or are in the process of doing so).
Full distribution of profits is increasingly cited as a thing of the past and our survey reveals that 29% of firms are retaining additional funds within their practice, and a further 25% are considering this. It is worth noting that in the corporate world it is accepted practice to hold back some profits to reinvest in the business and this is clearly becoming increasingly common among law firms.
There are fewer capital calls on partners than last year, with 14% of responding firms organising this and an additional 10% keeping this option under review.
It has long been the ambition of junior lawyers to become equity partners at their firm, and while this may still hold true, there is also a significant number going the other way. 30% of firms are de-equitising partners, with a further 20% considering this. Against this backdrop of fundamental change, almost two-thirds of respondent firms are either in the throes of reorganising their management structure or considering it. This is a similar proportion to last year.
For the first time, our survey asked about discretionary profit share and comments suggest that lockstep could be losing ground in favour of discretionary allocation. While almost three in four firms (71%) currently allocate less than a quarter of profits on a discretionary basis, this looks to be an area of change since one in three respondents expect to see a rise in the proportion of profits distributed on a discretionary basis.
Consolidation
For many years we have seen a high expectation of consolidation and this shows no sign of changing, with 80% believing merger activity will increase. While actual merger activity has been relatively low, a resounding 60% of respondents expect the Legal Services Act to be a catalyst for merger. Many participants added that there are a range of drivers at play, which for all firms centre on financial pressures and the need to manage costs, benefit from economies of scale and (arguably) the security of being part of a larger business.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
