The legal profession has been facing severe difficulties in any event with succession still the dominant topic.
Mergers and consolidation was becoming the hot topic with firms recognising that they could no longer continue as they were.
Ageing owners and dwindling profitability was slowly impacting the profession and many smaller firms were seeking merger partners, sadly many of these were unattractive to potential buyers and their only solution seemed to be controlled closure. The cost of this would be devastating for the current owners who had spent 30 years building a business that no one wanted.
Equity Partnership is increasingly lifestyle choice that 30 years ago would have younger solicitors chomping at the bit to become a partner, but not anymore.
There are circa 3,000 of these firms all around the UK, serving their community with traditional legal services generally delivered by partners of the firm charging an hourly rate that is no longer sustainable. For some the only solution may be to sell their will banks on an annuity basis based on new work generated.
What is the future of the legal market and how will legislative change and the challenge of succession impact on the legal sector?
I recently hosted an event for Legal News on the challenges and opportunities for law firms during the Covid-19 pandemic – and beyond. This article is an extension of my thoughts after that event. (You can find the video coverage of the Q&A session with Olly Pughe, Penguin Wealth, here.)
Identifying the new models and exploring the consolidation of the profession into much larger either floated or private equity backed practices.
Technology is changing the profession and anything that can be processed is being processed, particularly in disciplines such as conveyancing.
Many firms are turning to offshoring for the administrative part of the conveyancing process, particularly on the file opening and post completion – this can reduce costs by as much as 40% on a conveyancing matter.
Pre lockdown, I spoke at the Conveyancing Association annual conference in Celtic Manor and one of the key messages was technology impacting on the smaller firm’s ability to provide a profitable conveyancing service.
We have seen 700 less firms being able to offer conveyancing to their clients in the past year and according to Land Registry statistics of the 4300 firms currently providing conveyancing many of these would be unable to compete in the future. It was predicted that this number could well be around 1000 firms in the foreseeable future.
We all know that conveyancing was the life blood of many a practice providing quick cash flow that sustained the overall business. If we also accept that many of the smaller and mid-tier firms are poorly managed, then a hit on their cash flow could exacerbate the precarious financial position they find themselves.
We have new private equity backed entrants purchasing conveyancing firms with the intention of dramatically shortening the process to days rather than several weeks.
The cost of regulation
For a solicitors practice, the cost of regulation is high yet many of the services provided by a Law firm does not necessarily need to be regulated by the SRA. By moving non-reserved activities into a separate business that would not be regulated by the SRA then the cost of regulation could be reduced. For example, many firms provide HR and employment services to clients and these do not need SRA regulation neither does the administrative functions need this level of regulation.
Another trend has been to move residential conveyancing out of the core business and set up a separate limited company perhaps regulated by the CLC which provides lighter touch regulation and certainly cheaper professional indemnity premiums. These are some of the ways that firms could help reduce the cost of regulation, after all, one of the purposes of the new rules was to allow solicitors to work for other businesses such as accountants, insurance companies and IFAs and be regulated individually by the regulator offering non-reserved activities. The business itself would remain outside of the regulatory remit of the SRA.
The profession has changed significantly since the SRA was born back in 2007, at that stage we only had the partnership model available to us which as we all know encourages partners to share and draw out all the profits from the practice.
This model meant that no profits were retained in the practice but the individual partners became personally ‘comfortable’. As the partnership model gave the security of joint and several liability by the individual partners, the banks felt comfortable in aggressively lending to the sector and made more money from the legal profession that any other sector by utilising the large balances carried by law firms in their client account.
All the banks loved to lend money to solicitors firstly because of the above and also the access to client account monies, now that all changed some years ago because of Basle 3 and the banks liquidity issues. Very few law firms failed until the problems of the banking crisis in 2008 and only then did we started to see numerous failures and interventions.
In fact, in recent years the banks had been looking hard at the profession as a whole and at the generally badly managed practices.
Solicitors did not join the profession to manage a business, and the individual partners allocated responsibilities such as finance, compliance, marketing etc. did not feel comfortable with their role. Hence the rise of the professional CEO, a non-lawyer running the law firm as a business.
All the high street banks are aware of the challenges facing the profession, particularly in the personal injury and clinical negligence areas where the demand for working capital is no longer being supported as it once was. Whilst clinical negligence can be very profitable it often takes several years of funding requirement before profit is realised and the appetite to lend against this uncertain future is becoming more difficult to obtain.
We now have circa 10,400 law firms of which 68% are limited companies, 18% PLC’s and 14% traditional partnerships – what a change in 12 relatively short years. If we could turn the clocks forward to this time next year, I wonder how much devastation this pandemic will have on the legal profession?
That is a history lesson that changed forever in 2020 and will never return to the halcyon days of the past.
What does the future look like?
At the time of writing we are all maintaining social distancing if we venture out for essential supplies.
Covid-19 has changed the world like we have never seen in our lifetime and at this point in time none of us know where this might end. This could well be the catalyst that changes the way legal services are delivered.
The impact on both individuals and business is devastating and as many as one million businesses could easily fail. Solicitors firms are not immune from this disaster with many firms seeing their business fall by 50% in the past few weeks.
The UK Government has advised the nation not to move house even if contracts have been exchanged therefore the conveyancing firms have had no option but to furlough staff where possible.
In my discussions with numerous managing partners I suspect that even with home working the pipeline is for existing work is around six weeks’ maximum. One firm told me they had 500 conveyancing transactions ‘on hold’ which by implication means they cannot get paid for the work already completed.
There has been a surge in wills, lasting powers of attorney and doubtlessly probate work in the months to come but that will not change the new normality of working from home. Some firms have heavily invested in technology that has allowed fee earners and staff to successfully work remotely others have not! Firms that have invested in cloud based systems can provide incredible flexibility to their staff and fee earners and I would suggest that travelling into a city centre office might well have changed for ever.
I was discussing with the Managing Partner of a very successful, highly profitable practice that the remote working had allowed them to close offices and reduce overheads and he is of the opinion that this will be the new form of working – who can disagree?
The growth of Zoom and Teams has assisted many firms to conduct their business remotely. Even trial by Zoom has been successful and this technology will become normal long after the pandemic is over.
If we couple the use of such technology with those firms have invested heavily in social media and other forms of digital marketing and will see the rewards of this investment during and beyond this crisis.
In the present uncertainty firms will have to deal with the key issues head on. Accepting government support and furloughing staff to ensure key workers are still employed is essential for when this crisis is over. Cutting costs wherever possible until these measures can be eased is also part of the survival plan.
The underlying challenges facing the profession will not just go away and some of the fundamental weaknesses could well bring many firms to the realisation that there is no future. If your firm is facing these decisions, then I urge you to take professional support and advice sooner rather than later.
The next few months will see even tougher challenges and it’s going to get even tougher before it gets any better I’ve no doubt that when furlough ends we will see many redundancies and numerous failures.
We are facing the biggest recession since the second world war and once the bounce back and CIBLS loans have been utilised we genuinely need to take a hard look at the way we operate as a profession.
Opportunities & challenges for law firms
You can catch up on our recent event with Viv Williams, looking at the challenges facing the legal sector pre-Covid-19, the impact of the pandemic on practice areas, funding, regulation and management, as well as the potential opportunities for firms looking ahead. Click here to view.