Many of the UK's law firms are on the verge of going bust, it has been claimed.
Up to 15 per cent of the 9,000 firms will have to merge or face insolvency in the next few years. And it all could have serious implications for Birmingham, the largest centre for legal practice outside London.
Accountants BDO Stoy Hayward believes as a result of the already well publicised new reforms, including the Carter and Clementi reviews, banks are likely to have to tighten strategy for lending to law firms, which will adversely affect those already facing difficult conditions.
Kim Rayment, partner at BDO Stoy Hayward’s Birmingham office, said: "Banks are starting to realise the effect all the changes to lending strategy are going to have.
"Historically banks have been very keen to lend to law firms and they were insulated from the commercial pressures the banking, accountancy and other service sectors have had to face.
"Whilst banks are still keen to lend to the right firms, they now need to be more discerning in their decisions. We believe at least 1,500 UK law firms will need to merge or be wound up.
"There is also a widely held belief only small firms with three to four partners are at risk. This is because they have not needed a sophisticated practice management process. With many of the West Midlands' 1,121 law firms operating with four partners or less it shows that this is a real issue not just for Birmingham but the entire region’s legal sector.
"However, we would urge more medium and larger partnerships not to be complacent. The size of the partnership is just one factor and there are many larger firms who need to be more commercially minded.
"We don’t want to cast doom and gloom upon the industry. I would stress that well run, financially-aware firms and the strong niche players will be able to benefit from the changes afoot. There will be many opportunities to merge, which, if properly planned, will benefit all parties.
"However we would urge any distressed law firm not to be too rash and jump at the first opportunity of a merger. Quick defensive mergers could lead to lasting regrets long after the ink on the contract has dried."
Paul Farrow, chief executive of Birmingham Law Society, said many of the conclusions of the BDO Stoy Hayward report were "absolutely spot on".
He went on: "It is interesting that the report suggests 15 per cent of law firms may be facing insolvency – you could argue that might apply to many other sectors outside the legal profession, because business tends to get ever more competitive as time goes by.
"However, there is little doubt that the majority of law firms are not fully alive to the changes in commercial pressures that apply to all businesses – and relying on historical attitudes is likely to be a grave mistake.
"It seems to me that in the areas of marketing and commercial management, the legal profession has always tended to be one step behind the other professions.
"These days, every business has to be as commercial as it can be, and this includes the legal sector."
He added that mergers between law firms were not necessarily the answer to their commercial problems. "Mergers don’t always work out and can create more problems than they solve – bringing together two business cultures to form a new ethos is a difficult thing to do.
"A viable alternative is for businesses is to look closely at how they operate and how they might concentrate on their strengths in order to not only retain clients but attract new ones. Creating niche practices specialising in certain areas of expertise is an alternative to mergers."
