Impact of recession continues to dominate FDs’ views of the future for big firms

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26 February 2014

Risk to profits: finance directors predict downward pressure on fees

A survey of top-100 law firm finance directors has shown the consequences of the recent economic downturn continue to dominate predictions for the future, with regulatory and compliance work forecast to grow fastest and public sector work set to contract the most.

But unexpectedly, white collar crime work, which was last year tipped for significant expansion, has been given a revised thumbs down this year as an expected source of growth by many of the finance directors polled.

Meanwhile, fears for law firm profitability among finance directors were topped – as in the past three years – by downward pressure on fees from clients, while those who rated the choice of fixed fees over hourly rates as a ‘high risk’ to balance sheets shot to almost half from less than a third two years ago.

The Thomson Reuters annual survey of finance directors in the top 100 found almost nine out of ten felt regulatory and compliance work would grow over the next year, with more than a third (36%) believing it would be fast growth. A similar proportion said the same about the energy sector, although more than two-thirds thought the growth would be moderate.

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Other sectors where a substantial proportion thought growth was likely were construction (79%), commercial litigation and dispute resolution (76%), and restructuring/insolvency (60%). The legal research and know-how giant pointed out that last year, 67% forecast that “construction work would remain static or contract” and said confidence in the sector may have been boosted by developments like government property market stimulation schemes.

By contrast, the three leading areas of work where the finance directors predicted contraction were public sector, personal injury and PFI projects – as a consequence of public spending restraint and the LASPO reforms. Other areas in which fewer than half of those polled expected any growth were professional negligence and employment.

Surprisingly, views had changed on the prospects for white collar crime work, a sector that was last year earmarked for significant expansion – in fact it was the second highest projected growth area. But this year just half thought it would grow at all and nine out of ten of them expected no more than moderate growth. Thomson Reuters attributed this reversal of expectations to “renewed optimism” for economic recovery, since white collar crime and fraud work is more associated with economic downturn.

Asked what they thought were the “most significant risks to the profitability of commercial law firms”, for the fourth year running the finance directors named downward pressure on fees as their number one source of concern, with a full three-quarters of them listing it as ‘high risk’. In 2011 just over a half felt the same. A further quarter this year believed discounted fees were a ‘medium risk’. None felt it was ‘low risk’.

The next most serious perceived threat was continued weakness in corporate work, suggesting any confidence in economic recovery was limited. Almost all placed this as high or medium risk. Similarly, competition between firms was rated as a risk to profits by all but 4% of the directors. Eight out of ten also feared clients consolidating their legal panels.

Displaying anxiety over the difficulty of estimating fixed fees accurately, 88% felt that cost over-runs associated with fixed fees presented a danger to profit margins.

Sam Steer, head of large law for Thomson Reuters’ UK legal business, said: “Finance directors are well aware that getting pricing right is critical to minimising cost over-runs, but this is still relatively new territory for lawyers. Many are still finding their way in assessing costs accurately, particularly for complex or contentious work and at the same time they are under intense pressure to submit competitively-priced tenders which means pricing has to be very tight.”

She added: “It will be critical for law firm leaders to focus on how their firms can respond effectively to client demands for more efficiency and cost effectiveness in the delivery of legal services. That will mean, among other things, a willingness to adopt more flexible approaches that can tailor staffing and leverage technology to support work processes, and it will mean pricing models that meet the needs of particular clients in particular situations.”

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