Scots law firms optimistic about coming year

The survey, entitled “What’s next for Scotland’s independent law firms?”, found that 69 per cent of firms reported higher fee income in the first half of financial year 2014/15 and 44 per cent stating that they would have higher PEP than the same period last year.

A large number (86 per cent) thought it was likely or highly likely that there would be increased consolidation of mid-tier Scottish firms, with 79 per cent believing mergers would be with UK national firms.

Over two thirds (69 per cent) said they had been in merger talks but the number one barrier to merging was the lack of a firm with a suitable culture.

The survey reveals clear signs of increased confidence in the Scottish legal market and a considerable improvement in financial management since the 2008 economic collapse.

Additional capital has been injected by the partners of 20 per cent of firms with 27 per cent increasing their bank borrowings, but there is a note of caution as 43 per cent believe it is likely or highly likely that there will be more insolvencies of Scottish firms which, just ten years ago, would have been unthinkable.

Charles Barnett, professional services partner with BDO (pictured), said: “When the economy started to decline in 2008 law firms were, on the whole, quite slow to respond to the increased financial challenges.

“Many firms, which had been around for a very long time, perhaps took the view that they had survived previous downturns and this would be no different. Others got caught with substantial financial liabilities which became unsustainable when fee income reduced.

“Our current survey reveals a much more savvy, and financially aware, group of firms who understand that managing the accounts is as important as managing clients and the firm. These are positive developments which will position many more firms to take advantage of the improving economy.”

There is a harder edge to management with 100 per cent of those who responded reporting they had managed partners out of the business in the last year; 22 per cent demoted partners from equity to non-equity; and 11 per cent reduced significantly an equity partner’s interest in the firm.

This shows a more realistic approach to the management of legal practices, which prior to 2008, was likely to be less robust.

The optimism continues with increased recruitment. A quarter reported an increase of more than 5 per cent in staffing levels during 2014 and a further 69 per cent reported an increase of up to 5 per cent more staff. Just 6 per cent reported a reduction in employee numbers. An enormous 88 per cent reported increased recruiting in the next 12 months as the economy improves.

The survey found that 92 per cent of Scotland’s law firms believe growth will come from the real estate and construction sector; 54 per cent think the healthcare and life sciences will be positive; with 46 per cent looking to the energy and natural resources sector for growth.

Growth in service lines will come from private client work according to 77 per cent of firms, with 54 per cent believing growth will be in dispute resolution/litigation and jointly on 31 per cent employment and corporate and commercial work.

Mr Barnett added: “This survey is considerably more optimistic and positive than our previous one in 2011. In the intervening time many well established firms have gone but there is clear evidence that Scotland’s law firms have absorbed the message of the last few years and have taken affirmative action to ensure their firm will be around for many years to come.

“I think that Scotland’s legal market, which will continue to attract merger and acquisition interest from elsewhere in the UK and abroad, is in a healthier, more vibrant state than it has been for many years. This can only be good news for the sector as the Scottish economy improves and firms are able to take advantage of this growth.”