Pressures: Smaller firms struggling to cope
The number of law firms in England and Wales has dipped below 9,000 for the first time in recent memory after dropping by nearly 2,000 over the past 15 years.
The latest figures from the Solicitors Regulation Authority (SRA) said that, as of last month, there were 8,987 law firms.
In July 2010, the first figure published by the regulator, there were 10,885 firms.
The decline in sole practitioners is a major factor – from 4,030 in 2010 to 1,367 last month –reflecting in part the growth of fee-share law firms, where solicitors can effectively work as sole practitioners but with back-office support.
At the same time, the number of practising solicitors has grown significantly, from nearly 83,000 in July 2000 to 122,000 in August 2011 and 177,000 last month.
Solicitors who specialise in advising other law firms told Legal Futures that the numbers also reflected the changing shape of the legal market – and all expected the trend to continue.
Paul Bennett, partner at Bennett Briegel, said the fall was not entirely surprising given the consolidation trend of recent years.
“The profession has been steadily moving away from smaller firms towards larger, more diversified practices, partly driven by client demands for broader services and partly by increasing regulatory and cost pressures, making it harder for small firms to survive unless they have a niche.
“The traditional high street firm has been diluted as the market has evolved since the 2008 financial crash. However, high-performing small firms thrive, and high-trust high street firms succeed, but the consolidation trend is a factor over time.”
Whether the consolidation trend would stabilise or accelerate largely depended on “how the SRA’s approach to regulation evolves, particularly around risk and firm structures, and whether there’s any appetite for supporting smaller firms or solo practitioners”, Mr Bennett added.
For clients, fewer firms meant less choice, he went on. “For the profession, the challenge will be ensuring that consolidation doesn’t just lead to ‘law firm chains’ that are soulless and spreadsheet-focused but instead fosters real innovation and quality.”
But he remained confident that niche law firms would always thrive “as market depth and quality impact sophisticated clients”.
Nigel Wallis, a consultant solicitor at Liverpool-based O’Connors, identified two factors driving the reduction in the number of law firms.
The first was the “growing financial and administrative pressures on small and medium-sized firms, many of whom are struggling to finance the increasing regulatory burden and the IT security and technology advancements required to run a modern law firm”.
More and more of these firms were either winding down or, better, looking to merge with a successor practice for professional indemnity insurance reasons. “Given the huge number of firms in this predicament, we predict this trend will not only continue but accelerate.”
Mr Wallis said the second factor was the increasing activity of private equity-backed law firms with a strategy of growth by acquisition.
“So far, capital behind these private equity funds has largely been from US, UK and European investors who see professional services as providing an aggregator (or consolidator) opportunity. This follows a pattern we have already seen with insurance brokers, wealth managers and, more recently, accountants.
“Without private equity or public market capital, few law firms are sufficiently well funded to go on the acquisition trail, and so we predict this trend will also continue and accelerate.” But the challenge for private equity, Mr Wallis said, was how they achieved their exit.
John Gould, chairman of London firm Russell-Cooke, said the competitive position of smaller firms has weakened in every area of legal practice.
“The management, compliance and IT support now required has increased substantially. Legal generalists have never been at a greater disadvantage. Being local matters less. Areas such as routine conveyancing and legal aid no longer produce sustaining revenues.
“Many smaller firms have been unable or unwilling to make long-term succession plans pushing them towards mergers or private equity buy-outs.
“The goals of younger lawyers are changing, so that aspirations may be more orientated away from management responsibility as partners and more towards the flexibility of part-time or remote working. Mergers may feel like progress even if they are really just increasing the scale of risk.”
Mr Gould said it was hard to tell whether “the great consolidation” would turn out to be good or bad.
“Larger firms and markets with bigger players tend to produce higher prices. The experience of consolidation of vets and opticians has not been without its problems. Some consolidators are less stable and more prone to collapse.
“The detachment of individual lawyers from the business of practice is likely to produce a greater focus on the bottom line with less job security. Larger firms have more opportunities for efficiencies but can also become burdened with unproductive overheads or collapse by strategic errors.
“Specialists may be more effective but if there are insufficient GPs they may be hard to identify.”
For Iain Miller, a law firm adviser at City firm Kingsley Napley, as well as the increased costs of running a business, “being a local solicitor is no longer a competitive advantage as it is possible to deliver legal service remotely. I would expect this to continue for a number of years”.
Juliet Oliver, of consultancy Passmore & Oliver Partners, said consolidation had to be seen alongside “increasing number of solicitors, wider participation in the legal labour market and greater diversity of business models and delivery of legal services outside of regulated firms”.
She agreed that consultant models “are demonstrating the benefits of joining forces, rather than practising alone, and provide some shelter from the rising costs of practice”.
She concluded: “Small firms can still thrive but they will need to think about their strategy for responding to the changing environment.”
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