Professional services firms are important contributors to the health of the UK economy. Consequently, turbulence in this sector always creates anxiety. The last twelve months have seen the spectacular failure of a number of US law firms and of UK law firm Halliwells. In the latter case, under-investment by the partners in the business, over-extension of borrowings to fund impressive new offices, and the loss of key partners all seem to have contributed to the firm’s downfall. In a number of other cases, emergency mergers (in reality, takeovers) have been arranged. However, despite the past twelve months having been some of the most challenging ever faced by professional services firms, very few have perished and some have even thrived.
The following are some of the major features of the professional services firm market over the past twelve months:
•Partner mobility
With a continuing difficult economic climate in the UK, professional firms have adopted very different strategies. A significant number have cut costs dramatically and battened down the hatches. These firms have generally seen flat, or even falling, revenues and have had to continue shedding partners. Other more entrepreneurial firms have seen the opportunity to increase their market share by recruiting partners with strong client followings who consider themselves under-remunerated at their current firms. They have recruited aggressively both individual partners and teams. There has accordingly been an unprecedented degree of partner mobility in the past twelve months. Team moves have become a particular feature of recent times in the legal, accounting and chartered surveying professions. US law firms, in particular, have been opportunistic in picking up whole teams of lawyers.
There have been a number of consequences of this mobility. First, the enforceability of restrictive covenants has come to the fore - more than ever, firms are prepared to protect their practices by taking legal action against departing individuals. Injunctions and actions for damages and/or an account of profits increasingly result in negotiated settlements where large amounts of money change hands. Secondly, discrimination claims made by partners being asked to leave are on the increase. Many firms have still not fully appreciated the practical implications of the age, sex and disability discrimination legislation, and therefore often leave themselves exposed to significant claims.
•Merger activity
A significant number of merger discussions continue to take place between firms, including those between Clyde & Co and Barlow, Lyde & Gilbert and between Davies Arnold & Cooper and Beachcroft, although relatively few have yet come to fruition in the last twelve months. In the race to go global, both UK and US law firms continue to seek a transatlantic merger partner. One feature of many recent transatlantic mergers has been the use of a Swiss Verein structure (where costs are shared) to achieve the merger, rather than the creation of a single profit pool out of which all partners are remunerated on a consistent basis across continents and practice areas.
• Increasing regulation
Compliance and risk management issues continue to preoccupy those who manage professional service firms. Regulation has become detailed and burdensome, requiring both dedicated staff and specialist advice. Firms cannot afford to 'bet the firm' by neglecting this area.
•Legal Services Act
An overview of partnerships would not be complete without a mention of developments relating to the Legal Services Act. In the year of the full implementation of the Act, we will soon see the first Alternative Business Structures and, possibly, the flotation of a UK law firm. Smaller high street practices are under pressure as new entrants with well-recognised brands enter their markets - many high street practices will not survive. Other firms have restructured to include limited liability companies in their group structure, while corporate members have also become popular, both for tax reasons and in preparation for less restrictive ownership regulation.
Predictions for the forthcoming twelve months include:
• An increased number of mergers coming to fruition.
• The flotation of at least one professional services firm.
• The accountancy profession re-entering the legal services market in a serious way.
• Increased competition, particularly from new entrants not hidebound by traditional working practices.
• Continuing downward pressure on fees.
• Law firms admitting more non-lawyers to their partnerships.
There are interesting times ahead.