Law firms more confident as economy improves but major challenges lie ahead

March 5, 2014

Optimism among law firms is at its highest level for seven years despite an increasingly competitive business environment and forthcoming major tax changes.

Eight in 10 firms are confident about the year ahead, compared to six in 10 last year. Smaller firms – those with 25 partners or less – are the most upbeat, according to new research by the Bristol office of accountancy and investment management group Smith & Williamson.

The survey of 102 of the UK’s top 250 law firms showed, however, that despite their optimism, trading conditions have become more competitive over the past 12 months. Almost nine in every 10 respondents expect greater competition as a result of the Legal Services Act.  Pressure on fees was cited as the greatest, ongoing challenge.

The research also shows that firms are adopting a range of strategies to cope with the pressures. Cost control, recruitment of lateral hires and business development through enhanced IT were regarded as offering the greatest opportunities to enhance profits in the coming year and are important to firms of all sizes.

A third consider merging with another firm as a route to improving their profitability. 

Nearly four in 10 firms (39%) have set up a new service line in the past year, while 24% expect to do so in the next 12 months. This suggests a focus on cross-selling services to existing clients and an increasing level of diversification.

Other measures taken by respondent firms in the past year in response to the business climate included sub-letting office space (18%), de-equitising partners (15%), opening a new UK office (14%), opening an overseas office (12%) and centralising functions (11%).

Another other major challenge is the significant change to the tax rules governing the way partners of law firms and other partnerships are taxed. The new rules, which come into effect on April 6, could potentially have significant cost implications for both the partners and the firm.

Smith & Williamson Bristol partner and head of its professional services practice, Ian Cooper, pictured, said: “Signs of renewed growth in Bristol and the wider South West economy as well as the UK generally look to be the primary factors behind these results, fuelling hopes that a more solid recovery is on the way.

“We expect that a significant number of partnerships will be affected by the tax changes, including those that have fixed equity partners, a service company or a corporate member. Although the revised Finance Act 2014 legislation has yet to be published, firms must urgently consider their options and work out a plan so it is implemented.”

Mr Cooper, whose team advises professional service firms in Bristol and across the South West, added: “All partnerships need to review their position without delay as the penalties for getting it wrong could be significant.”

To download a copy of the research visit:

Alternatively, a copy of the report can be obtained from Ian Cooper on 0117 376 2000.

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