Law Firms Feel the Threat of Difficult Climate; CLIENTS DEMANDING MORE SERVICE FOR LOWER FEES
Byline: SION BARRY
CONTINUING cashflow issues and this autumn's deregulation of the legal sector threatened the very survival of some law firms in Wales.
Research from accountants and business advisers Grant Thornton warns that extra strain is being placed on law firms' working capital at a time when the business environment has deteriorated and when clients are demanding more service for lower fees.
The study says the financial crisis and the failure of national law firm Halliwells have transformed the outlook for many law firms, with further change due to sweep the sector with the introduction in October of the Legal Services Act.
Recovery and reorganisation partner at Grant Thornton in Cardiff, Alistair Wardell said: "The effects of the credit crunch and the high-profile failure of Halliwells have arguably exposed the underlying weakness of a business model that is based on the full distribution of profits each year.
"The challenges in the current business environment in Wales mean that it may be more difficult for some firms to maintain existing lending facilities and as a result, some may cease to operate in their current form."
The report, entitled How Vulnerable is the UK Legal Sector?" - identifies several factors which are having an impact on law firms' performance, which include: Pressure on fees resulting in lower profits - the use of law firm panels and e-auctions is now commonplace, with those firms exposed to "commoditised" product areas or reliant on a small number of institutional clients, being most at risk; increase in bank debt levels - the report says in many law firms, bank borrowing has risen far faster than average members' capital, with cash resources being reduced significantly; impact of public sector cuts - pressure on fee rates is likely to intensify among law firms with a high exposure to the public sector, while governmentfunded workflow will be increasingly unpredictable. …