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.
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