Now we have the Legal Services Act on the statute books and the first 100 alternative business structures (ABSs) applied for, what does this mean for the 8,000 or so firms who are facing a challenging future?

This year many partners in legal firms will have a lot of thinking to do as they face up to what will probably be the greatest change seen in their working lifetimes. Most firms have already taken decisive action regarding the control of their overheads but the new entrants into the legal market will be marketing machines and will erode the 'client' base relationship unless the local solicitor brand actually delivers what they are looking for.

The legal profession has largely been insulated from the cold commercial winds that have blown through the banking, accounting and other service sectors. Many years ago all firms in these sectors enjoyed relationships with clients who valued their skills and paid appropriately for them. However, since the early 1990s we have seen clients become customers, expecting and demanding quality service delivered on time. Their main driver now is price. A customer shops around, a client does not.

The banks reacted to internet access and the changing demands of customers, hence a much reduced branch network. Accountants and others have to quote for work in advance and fixed-fee pricing has become the norm. Many solicitors though still insist on giving top quality client service to customers (rather than clients) which is becoming increasingly uneconomic.

Around 75% of legal firms have four or fewer partners and are typically high street firms. In many cases they do not have sophisticated practice management (and have not needed this in the past) and therefore will find it harder than their larger rivals to cope with the new commercial world that is coming.

To add further momentum, the banks are starting to realise the potentially dangerous effect all the changes are going to have on the legal market. Historically they have been very keen to lend to partnerships. Personal guarantees from the partners, low failure rates and the income from large client account credit balances that practices maintain encouraged banks to lend a high proportion of turnover at a perceived low risk. Numerous smaller insolvencies and, of course, Halliwells, have dented the confidence of the banks in their lending policy to solicitors.

Now the banks, whilst still keen to lend to the right firms, realise that the changing market requires them to be more sophisticated in their lending decisions. Many have specialist teams who will be benchmarking firms against each other to help identify the winners, who they will back, but more importantly to try to spot the so-called losers who they will not want to support.

Those firms reliant on litigation, personal injury and clinical negligence will find it even more difficult to gain access to capital. A number of specialist lenders in the sector have pulled out and the banks are certainly not prepared to step in and support volume personal injury and clinical negligence work. Although these departments have been considered hugely profitable in the past, they are also the biggest drain on financial resources. The Jackson reforms could place many of these practices under severe financial pressure and who can blame the lenders for pulling out of this uncertain market?

All of the major banks are concerned by this lack of capital and their exposure to PI firms is being closely scrutinised. This could see numerous firms needing to sell their books with very few, if any, buyers of this type of business. Certainly, there will be no cash up-front on any such transactions - does this mean a steep rise in law firm insolvency? One after-the-event provider is clearly concerned and suggested that all 250 firms they supplied could well need to merge or be taken over in due course as they run out of cash.

Insolvency practitioners who specialise in legal practices tell me there is a steep rise in the demands for their services since the beginning of 2012.

However, the banks tell us they are open for business and if only 1,000 firms need to merge, be acquired or close in the next few years then up to £1.2bn of revenue will be on the move. This is calculated by assuming a typical three partner firm has an annual turnover of £1.2m. Banks’ lending to support this revenue would typically be in the order of £700m, based on lock-up in work in progress and debtors of seven months (longer if personal injury is involved).

With this level of revenue involved it is easy to see the potential attraction for the consolidators. This in turn will place pressures on the middle tier firms, who will find smaller firms seeking to do company commercial and similar work in competition to them. It is not only financial pressures that need to be addressed, as increased compliance has become a hot topic within the profession. Outcome-focused regulation and the new compliance officer for legal practice and compliance officer for finance and administration requirements will place additional challenges on firms without sufficient resource.

The well run, financially aware firms and the strong niche players will be able to gain from these changes. There will be many opportunities to merge which, if properly planned, will benefit all parties but beware of the quick defensive merger that everyone regrets as soon as the deal is signed.

The solicitors practice is not an endangered species but it must evolve and adapt to the new commercial world as other service providers have had to. Sadly, 2012 could well be the year of insolvency for numerous law firms.

10 top tips for better practice management:

  • Keep a tight control on cash - remember 'Cash is King'
  • Review your corporate structure for both ABS opportunity and succession planning
  • Understand the working capital cycle of the firm
  • Have a clear defined strategy and ensure you have the buy in from your partners
  • Look after your staff as they will always be the source of your competitive advantage
  • Make sure your investments in IT systems and processes are effective
  • Is your marketing strategy up to date and effective?
  • Are your partners aligned in their objectives and motivated to implement the firm’s strategic plan?
  • Don’t forget the risk management issues. One badly done job will be remembered, no matter how many good ones you do
  • Watch your competitors. Understand who is doing well and find out why
    • Viv Williams is chief executive of 360 Legal Group and specialises in law firm management, structure and merger