Law firms which haven't got their act together face a summer of confusion

By Nick Jarrett-Kerr, Visiting Professor, Nottingham Law School

Law firm leadership is not exactly a bundle of fun in the UK right now. Firstly, there are still undoubted financial pressures. The first few months of a new financial year always prove to be a difficult time – the view from the bottom of the mountain often seems daunting.

I am hearing from some law firms that trading conditions seem to be hardening again. This could be bad news for a number of firms that are currently hanging on by their financial fingertips hoping for the rescue of a trading upturn.

But it may also be bad news for firms which have survived well until now but whose financial reserves, partner cash-call options and borrowing capability are already stretched.

Secondly, preparations for the era of outcomes-focused regulation (OFR) are proving to be testing. One risk manager – in a firm large enough to afford a dedicated professional to oversee such matters – told me that the project is consuming all of her available time right now.

Then there are firms which have yet to do anything about the new rules and – through lack of preparation in the good times for the regulatory changes – will have to expend valuable time and expenses scrabbling to catch up.

Thirdly, it is now absolutely certain that the alternative business structures (ABSs) regime will be with us sometime fairly soon, even if it gets delayed by a week or two from its scheduled 6 October launch date.

As you read this, many firms will be busy submitting their ABS application forms so as to be able to launch their ABSs as soon as the law allows it. Although ABS D-day is not necessarily an all-or-nothing deadline, there could nevertheless be an unwelcome surge in competitive pressures for exposed firms as new or enhanced entities publicise their arrival on the legal scene.

The early external movement seems to be in the personal injury and consumer law markets, where The Co-operative Legal Services and insurance companies like DAS are already making moves.

The legal community is also responding, with early movers such as Irwin Mitchell announcing plans to float and organisations such QualitySolicitors already gaining traction.

Market impact

In reality only a relatively small number of law firms are going to be ready for all three of these immediate and fast-moving challenges. It is not difficult to imagine a trading environment for the rest of 2011 in which continued economic stagnation combined with feisty new market entrants could result in a revenue attrition of 10 per cent or more for firms which have not got their act together.

Changes to the regulatory landscape like OFR can only make matters worse. Conversely, some firms will continue to do well – those which are well prepared for different market conditions, that are financially stable and which have achieved a worthwhile competitive position. The gap between slow and fast and between badly and well managed can only widen in the face of these challenges.

But what about those in the middle – the average firms? After all, it is easy to highlight the extremes between good and bad. There may indeed be little sympathy for firms which fail because of poor management, insufficient planning or disastrous decision-making. There are however vast numbers of firms that are neither especially bad nor especially good.

Such ‘utility firms’ – those with a safe pair of hands (usually) but with little to mark them out as specialist or as occupying a competitive market position – do not deserve to fail. But, in the absence of a rising economic tide to lift their boats, there is considerable concern about their future viability.

These are the firms that are unlikely to be able to afford to hire a dedicated risk manager to mastermind their response to a new regulatory environment. These firms have martialled their limited financial resources thriftily so far but are now finding that there is no more fat to cut and no more borrowing capacity to exploit.

These are also the firms that have no real desire to diversify into an ABS and yet may rapidly become exposed to the new market entrants in the autumn.

Although very late in the day, time spent in preparing and planning for October will rarely be wasted even now but, for some firms and their partners, it will mean a summer of confusion with long hours at the office and long faces at home.