More than half of Scotland’s law firms have held merger talks in the last year, despite benign trading conditions in which nine out of ten are generating higher income.

According to a sector bellwether, the nation’s solicitors believe the market is 'saturated’, with too many firms and lawyers chasing work. 

A new survey by accountants BDO, Gearing up for the future, found that Scotland’s law firms are generally optimistic about their prospects. Some 88% of firms reported higher fee income in the first half of 2015/16 and 65% forecast higher profit per equity partner than in the same period last year.

In 2015 82% of firms recruited additional staff and 35% of those increased their headcount by over 5%. Nine out of ten firms reported that they will be recruiting more staff in the next 12 months.

Martin Gill, head of BDO LLP in Scotland, commented: 'These figures reveal a legal sector which is remarkably optimistic and seems to have bounced back from the recession with some force. However, countering this optimism remains the view that the market is saturated, with 69% of firms believing that there are simply too many lawyers and too many law firms in Scotland.’

Over half of firms (53%) reported that they had held merger talks in the last year. Two-thirds of those cited a lack of cultural fit as the main reason for not merging, while 33% cited onerous property lease commitments.

Three-quarters (75%) believe that more mergers with UK national firms will happen in the next 12-18 months, while 63% think there will be increased consolidation of Scotland’s mid-tier.

A number of Scotland’s biggest legal names have disappeared through cross-border tieups, including erstwhile ‘big two’ McGrigors and Dundas & Wilson. Last month merger talks between Maclay Murray & Spens and Addleshaw Goddard are understood to have been called off.

Some 37% of firms felt it is likely that more law firms may become insolvent in the coming year. ’This reflects a much more realistic outlook, presumably engendered by some of the shocking insolvencies in the legal sector in recent years,’ BDO said. North of the border, recent high-profile administrations have included Tods Murray and McClure Naismith. 

The survey also reports signs that Scotland’s legal sector has developed stronger management capabilities. Almost three-quarters (70%) said they had managed partners out of the business, with 60% stating they had significantly reduced an equity partner’s interest in the firm.

Some 40% said they had demoted partners from equity to non-equity.

Gill added: 'It is clear that the legal market believes that there are too many law firms and lawyers chasing too little work and that mergers and even failures are the likely outcomes in the coming year. The Scottish market has changed over the last few years and adopted more business-oriented and realistic approaches to operating law firms, but there may still be some way to go.’

The biggest practice management issue is the number of lock-up days, with 75% of firms reporting a concern. This is followed by 56% of firms expressing concern over chargeable staff not achieving budgeted billing hours, with 50% reporting that clients are negotiating lower fee levels.