In the aftermath of Clementi, apocalyptic predictions of a wholesale shakeout of the legal ‘industry’ (sic) proved wide of the mark. But consolidation has still been a thing – even though it took years to get going. The number of law firms registered by the Solicitors Regulation Authority has fallen by 1,000 since 2020, for example, to just over 9,000.
Interrogate the data, however, and the picture is nuanced. Over half of that decline is accounted for by the diminution in the number of sole practitioners. For hundreds in this category, the ever-growing burden of regulation has proved insupportable.
That chimes with this year’s Bellwether Report from LexisNexis on the outlook for small and medium-sized law firms. Topping their list of concerns is meeting compliance regulations. This is flagged as a ‘very significant challenge’ by nearly 40% of respondents, with an additional 29% rating it as ‘quite significant’. Second on the list is keeping up with legal challenges, and third attracting new business.
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Curiously, growing disquiet about lengthening spools of red tape is not fuelling merger discussions. Or not any more. Appetite for mergers and acquisitions has ‘plummeted’, the report finds. Just one in 20 firms is now considering getting into bed with a peer as a growth strategy, down from 13% just two years ago.
Why so? Financial risk was the most common reason cited. But risk was hardly absent in 2023.
Over the last decade, muses Fox Williams partner Ben Giaretta, many firms ‘have been driven to merge by a desire to “keep up with the Joneses”. With fewer higher-profile mergers hitting the press, firms have reverted to their tried and trusted strategies for growth’.
Maybe. But another factor is surely the fillip to profits bestowed by interest on client money since rates started rising in 2022. Many SME firms are doing very nicely, thank you. The financial imperative for seeking a combination may simply no longer be there. With interest rates coming down again, of course, it may well return.
Curiously, the LexisNexis report doesn’t mention client interest, and nor does it dwell on whether firms have put their hourly rates up. ‘Traditional billable hour models often feel bloated and unpredictable’, we are told – but there’s nothing original or particularly insightful in that.
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