Following the collapse of Birmingham law firms Cobbetts and Blakemores attention has been acutely focused on the city’s legal sector.
The challenges facing it are many, including the advance of Alternative Business Structures, sweeping changes to Legal Aid and increased regulation, with uncertainty as to what the future might hold.
In the wake of the pre-pack deal to acquire Cobbetts by DWF, speculation suggested as many as 2,000 law firms were in talks with the Solicitors’ Regulation Authority (SRA) about their financial stability.
But the boss of one city law firm thinks the figure could be even higher.
“That is an underestimate – particularly at the smaller end – but we don’t know how many” said Paul Wilson, chief executive of Birmingham-based Shakespeares, who believes the sector has had to cope with a lot in the shape of the economic downturn, increased regulation and new competition.
“Our regulator has changed and their demands are becoming increasingly expensive,” he added. “If you are a small firm costs can become very difficult.
“We are also seeing new competition and that is forcing our existing competition to come up with new ideas.
“Three things in combination – the economy, the regulator and now competition – mean if you are struggling already it could become a very difficult market.”
Admitting he was surprised when Cobbetts went into administration Mr Wilson believes firms that have “become more like businesses than law firms” have weathered the storm better than others. He added: “Cobbetts was a fantastic brand and it was a surprise but you would assume there are more in the top 100 that are in the same position, trying to find balance in their cashflows.
“Others have done very well in the last five years and managed to make the recession work for them. If you go back to 2007 there had been 13 years where people only saw growth.
“But Lehman Brothers going down and the collapse of the property market had a devastating effect on the legal market. Everybody thought it would go away and come back pretty quickly but we took the view it was a minimum of five years and expect another five to seven years of zero growth.”
Looking to the future Mr Wilson believes both high street firms and bigger law firms will continue to face tough times.
“I think our industry has not been forced to modernise quickly enough,” he said. “The high street is a very difficult place to be. Insurance costs and the cost of regulation are going up.
“We will probably see more firms merging and I expect to see continuing consolidation of the top 100 law firms in the UK, as well as much bigger worldwide firms and regional law firms.” As regards the 2,000 law firms that might be experiencing financial issues, the SRA did concede talks were ongoing with some firms about contingency measures in the event of insolvency but said the figure was not that high.
Tom Wood, head of professional services at Barclays, believes the figure could easily be a realistic one, particularly as the number of law firms has dropped to the lowest level since figures were collated in 2009.
SRA statistics show there were 10,819 firms in England and Wales at the end of January this year. The number peaked at 11,369 in May 2012 but has been falling steadily since. Mr Wood said: “There are over 10,000 law firms in the UK, five or six thousand are one or two partner firms and 85 per cent have less than five partners – so I wouldn’t be surprised. On that basis that is probably not that far away.
“The whole industry is finding the market tough and tougher than in previous years.
“There will be a large proportion of firms who are talking about having financial problems at the smaller end. There is lots of financial pressure for any firm in the UK at the moment and smaller firms feel it more than the bigger ones. Financial struggles are predominant but not necessarily exclusive to the smaller firms and some of the bigger firms will also be finding it tougher than they have in the past.”
Mr Wood added that the changing relationship law firms have with the SRA is also having an effect
“The SRA is requiring more reporting, so the requirement of a firm to report to the SRA has increased too,” he added. “They didn’t always have to be so open with their financial performance.”
As far as what the future might hold Mr Wood believes there will be some failures and more consolidation, as well as new entrants. “The number of law firms won’t decrease massively quickly but I wouldn’t be surprised if we lose 20 per cent of firms due to consolidation and a few failures,” he said. “Every sector has failures, the law has seen some recently and I guess we will see some more. The sector is not in trouble but there is a mixture of firms in terms of those who are adapting to the changes - some will do well and some will find it difficult.
“It is still a very profitable industry and there are a number of very well run businesses operating within it.”
Colin White, whose firm Ortus Group specialises in advising law firms in relation to mergers and acquisitions, believes there will be more consolidation.
“I think the market dictates there need to be fewer firms so the answer is consolidation but there are going to be redundancies and people leaving the profession,” he said.
With smaller firms more in the firing line than most Mr White believes they face some tough decisions regarding their future.
He also stressed selling a firm or entering in to a merger are not always easy processes due to “unrealistic expectations” of the value of a practice.
“When you look at mergers and acquisitions there is often an unrealistic expectations with the value of a practice,” he added. “That is something people can find hard to come to terms with.”