Managing partners expect a bout of consolidation in the legal market in the coming year, according to an authoritative benchmarking survey seen exclusively by the Gazette.

However, the research shows that most law firm leaders believe their firm to be on a solid enough financial footing not to need to source additional funding.

The annual benchmarking survey of 95 UK-based managing partners, chief operating officers and chief finance officers in law firms, conducted for Winmark’s network for managing partners (NMP), showed that 81% predict further consolidation of the legal market.

Half of firms with a turnover of less than £50m said they had been involved in merger discussions in the past year, while 41% of all firms expected to be involved in merger or acquisition discussions in 2011.

The economic outlook among firms was predictably downbeat, with half of those questioned expecting ‘stagnation’ or worse in the UK economy. More than half of firms believed that their insurance costs would go up, while 30% also expected an increase in bad debts.

However, despite these challenges, the research showed that 67% of firms do not expect to source additional funding. Of the minority that will seek funding, most will look to a bank loan (70%), and/or seek equity from the firm’s partners (55%). Only 5% said they were considering external investment of any kind, suggesting a low takeup of the new funding opportunities that will be available under the legal services reforms due to take effect in October.

Many firms cut costs to maintain profitability over the past year, according to the research. Nearly two-thirds froze salaries; 70% reduced support staff headcount; 56% cut professionals; and 27% reduced the number of equity partners. However, profit was the ‘least impacted’ measure of how firms were affected by the economy in 2010.

Most firms predicted that they would not need to make further salary and job cuts, while many intend to increase spending in other areas. Some 42% plan to spend more on marketing and business development, while 5% will cut spending in this area, and 48% expect to increase the IT budget, compared to 11% that will pare IT spending.

Although some firms are looking to increase technical outsourcing, including legal process outsourcing, most are not, with only 18% expecting ‘to outsource at some point’.

Tony Williams, principal at Jomati Consultants, who wrote the foreword to the NMP report, said: ‘Consolidation, innovation and technology, and growing international capability are key changes managing partners expect to make – but all require significant investment.’ He added that this was needed against a backdrop of managing partners’ expectations for the economy that implied ‘no early return to the bull market highs’.

The survey attracted responses from 95 managing partners, COOs and CFOs from firms with turnovers ranging from under £10m (16%) to more than £500m (8%).