Cash-strapped firms must adjust to the ‘new normal’ of fixed fees and low margins for work, new research has concluded.

The annual survey by professional services firm MHA said fixed fees have been a factor in an income drop in 2017 experienced by smaller firms. The report said price competition is already a regular occurrence and is forcing firms to reduce quotations to win work.

Karen Hain, head of the professional practices group at MHA, said firms must juggle adjusting prices while ensuring profitability. ‘Efficiency will need to be a key planning theme for 2018, so that all work is done following the quickest and most accurate procedures, by the lowest costing individual,’ said Hain.

The report found staff profiles in law firms shifted markedly in 2017, with fewer senior fee earners, more paralegals and more support workers than in previous years. This is attributed not just to costs pressures but to the difficulty of recruiting experienced fee earners.

The falling number of fee earners is also one of the reasons why fee income has dropped, but profits are expected to increase again for 2018 once changes have taken effect.

Senior fee earners that remain have tended to opt out of the route into equity, preferring instead to take a high salary package with no risk attached. This may have knock-on effects for firms’ succession planning, suggested Hain.

‘These equity partners are demanding higher return for their risk,’ she added. ‘Our expectations for the future are that equity partner numbers reduce further, so that a smaller number of partners share profits to give a better return on their investment in the practice, and because high paid fee earners do not want to give up employment security for a partnership position.’

MHA, which acts for around 200 legal businesses, said bank lending to the sector has reduced in the last couple of years. Instead, firms have had to look for additional finance streams, with some smaller outfits seeking short term finance companies to fund the payment of large one-off expenses, such as professional indemnity insurance.

The lower level of external finance has been mopped up by partners drawing less, or even putting in capital of their own.

Larger firms rely more on long-term borrowings and are seeking new ways to structure debt so as to cover future issues such as partner retirements.