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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.
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guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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