Will 2013 prove to be a happy new year for ALL small and medium-sized practices? We are now into a new era of outcomes-focused regulation (OFR) and the vast majority of firms have their compliance officers for legal practice (COLPs), and finance and administration (COFAs) in place, with the exception of a few hundred. The latter have just sent an open invitation for a visit by the Solicitors Regulation Authority in the early part of 2013.

There has to be consolidation within the legal sector: it is envisaged that somewhere between 2,000 to 3,000 firms will end up merging, consolidating or simply going out of business in the next few years. We have seen the first sizable merger in 2013 – West Country firms Harrison Clark and Rickerbys creating a £20m-plus turnover practice. This seems a perfectly natural fit with two well-run and well-managed practices joining forces to drive down costs and overheads, and the cost of compliance.

Is this the sign of things to come? How many firms can honestly say they are well run, well managed and profitable in the current economic climate? Have many of the firms who have been having ‘chats’ about the future now realise that the only way to pay for and survive this new regime is by getting bigger to share the potential cost of compliance under the new OFR regime?

We have seen a number of online and consultancy offerings springing up in the past few months and we doubtlessly will see many more but have we really evaluated what the true cost of compliance under the new regime will mean for too many smaller firms? Those firms who have brought themselves to the attention of the SRA by not complying with the appointment of a COLP and COFA are likely to receive an early visit. Any other avoidable breaches could well result in firms being targeted by the SRA and hung out to dry.

The financial services industry has experienced outcomes-focused regulation for the past decade and it seems that OFR needs a few prime examples to make the remainder sit up and listen. If we look back to the early days of OFR compliance in financial services then we see very heavy fines we handed out to those businesses that failed to comply. Is this the stage we are now at with the legal profession? How many firms have paid lip service to the new regime and will they only take these fundamental changes seriously when examples are made?

Specialist consultancy does not come cheaply and the online offerings, although excellent, still require some hand-holding; hence what will be the true cost of complying with OFR? It is reported that the cost of compliance, done properly, can approach a figure around 20% of a firm’s turnover – this includes COLP and COFA training time, compliance officers and the preparation of all necessary documentation. Many firms are not making a margin of 20% before drawings so will this mean the cost of complying with OFR could well push many firms over the edge?

The predicted number of mergers and consolidation within the profession has not happened to date but everyone is allegedly talking to everyone else about merging. With a few notable exceptions, firms have continued to muddle through with their banks’ support but what happens if the cost of compliance escalates to this sort of level?

Many firms simply cannot afford any additional costs and it may well become attractive for firms to merge into larger practices who have the resources to provide compliance support to their firms. We have seen a number of mid-size and smaller practices acknowledging that the cost of compliance could well make their business unsustainable. So what are the options open to them?

Spreading the cost of compliance in larger practices could prove an attractive option to some, in other words larger practices could well offer their compliance service to smaller firms; merging or being acquired may be another but care should be taken in both the way your firm is presented and to whom you offer your practice.

It is imperative that if this is the stark reality of the future of your firm then please get help; do not jump at the first offer that comes along. There is a way of organising a successful conclusion to merging your practice – doing it yourself should not be on the agenda. Compliance is not just reviewing a few files and considering what your options are. It should be an integral part of your on-going strategy for running your practice

And compliance could well be the catalyst to spark the consolidation in the profession that has been anticipated and predicted for the past few years.

Viv Williams is chief executive of 360 Legal Group, which provides a dedicated business consultancy service to UK lawyers