One in seven smaller firms see merging as a way of coping with future competitive threats to their practices - challenges that firms think will overwhelmingly come from outside the profession, according to a report out this week.

More than half of small firms questioned said household name retailers, banks and other service providers pose the biggest threat to their business in the next five years.


In a survey by Central Law Training of 122 firms with between four and 12 partners, 14% said they have considered merging to protect their position.


Almost one in five firms said they may 'join a national network', with another 19% saying they have looked at 'refocusing on niche and higher-margin areas of practice'.


Smaller firms seem not to want to get involved in commoditisation, with only 3% saying they have considered adopting a more 'wholesale approach', and 17% saying they have thought of moving away from areas of legal practice where margins are being squeezed.


Management consultant Peter Scott said this strategy made sense. 'The biggest threat is going to be to those parts of the profession which are already in the commodity business,' he said.


There are huge opportunities for law firms as well as threats because 'outside investors have to have someone to do it for them', but firms that continue to run their businesses 'as a cottage industry' will likely cease to exist, he added.


When asked to pinpoint the single most important threat to smaller firms, 57% of those surveyed said retailers, banks and other service providers. Firms also said they see retailers as much more likely to come into their market than financial companies.


However, legal marketing consultant Nick Jervis warned that law firms have heard too much of 'Tesco law'.


He said: 'Halifax has launched legal services. I am sure as more and more banks follow suit, the percentage of solicitors worried about competition in the future coming from banks will by far outweigh the fear of the supermarkets.'


The firms almost unanimously predicted that running a small to medium-sized firm is going to be more difficult in the next five years.


Four out of five of the firms surveyed, 97 out of 122, said they did not feel they received 'adequate support and advice about long-term business planning' from bodies such as the Law Society.


The Law Society rejected the criticism as being drawn from too small a sample, and called the results 'surprising'. Chief executive Desmond Hudson said: 'We are determined to develop our services to provide more support so small firms can meet the growing challenges ahead.'