Nearly a third of top firms “considering external investment”, says survey

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By Legal Futures

12 August 2011

External cash: firms thinking about moving early to embrace ABSs

Nearly a third of the top 100 law firms are considering taking external capital, while a few see floating on a stock exchange as “likely”, new research has claimed.

A survey of 25 finance directors at the top 100 by Sweet & Maxwell found that “a significant number” of the firms are considering embracing alternative business structures “at an early stage”.

Asked how likely they were to take various steps in response to the Legal Services Act, 29% said it was “possible” that they would seek private equity investment; the rest said it was unlikely.

One firm (given as 4%) said it was “likely” to float, an option not being considered by the others.

Incentivising staff by offering them equity in the business was similarly seen as likely by one firm, while 38% said it was possible.

Merging with another business, such as a bank or insurance company, rated low, with one firm saying it was likely and one saying it was possible.

Hiring an accountant as a fee-earning partner was seen as likely by one firm and possible by 33%, while hiring a commercial property agent or independent financial advisor was rated as possible by 13% and 17% of firms respectively.

Making support staff into partners was the most likely response to the Act: 8% said it was likely and 38% “possible”.

The survey also looked at the steps firms are considering to improve their profitability.

Tighter credit control, more cross-selling and higher charge-out rates were rated the most likely. In all, 75% might increase their charge-out rates (compared to 61% last year), even though 42% warned that downward pressure on fees from clients will pose a significant risk to profitability over the next year.

But Sweet & Maxwell said there is a “growing feeling” that cost-cutting has gone as far it can go, “and with pressure building to increase pay, law firms may have to raise fees”.

A third of firms said a merger was either likely or possible.

There was less appetite than last year to cut unprofitable services, which the survey said indicated that firms are taking a longer-term view. With more cross-selling activity, “finance directors might be more prepared to retain unprofitable services as loss-leaders”.

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