‘Scotland weighed down by too many law firms’

There are too many lawyers and too many law firms in Scotland, a new survey carried out by accountants BDO has found.

The census of the legal profession found that although Scotland’s law firms report being “optimistic” about trading in the coming year, more than half of law firms north of the border have held merger talks in the last year and 37 per cent think it is likely more firms will collapse, according to the accountancy firm.

Financial performance is strong and firms are confident that their pipeline of client instructions will continue to flow steadily in 2016, according to the results of BDO’s survey of independent Scottish legal practices.

For the first half of the financial year 2015/16, 88 per cent of respondents reported higher fee income and 65 per cent higher profit per equity partner (PEP) than the same period in the previous year. In 2015, 82 per cent of firms recruited additional staff and 35 per cent of those have increased their headcount by over five per cent. Eighty-eight per cent predict that they will be recruiting additional headcount in the next 12 months.

In response to the question whether firms think their PEP will be higher this year, 81 per cent of firms said yes, up from 64 per cent last year.

“Only 19 per cent expect that their firm’s profits will remain broadly the same and none predict that it will be lower than last year, which is consistent with last year,” the survey states.

Further consolidation of mid-tier Scottish firms or mergers with UK national firms is expected. Fifty-three per cent of firms stated that they had held merger discussions last year. For those who did not, the lack of cultural fit was cited as the main reason. Having said all of that, 69 per cent of respondents believe that there are still too many law firms and lawyers in Scotland.

The survey states: “Unsurprisingly, merger discussions are continuing with only a slight reduction in the number of firms confirming that they have been in talks with another firm. This is a clear reflection of the fact that the consolidation of firms in the Scottish legal market is expected to continue.”

Almost three quarters (70 per cent) of firms said they had managed partners out of the business, with 60 per cent stating they had significantly reduced an equity partner’s interest in the firm and 40 per cent that they had demoted partners from equity to non-equity. In this connection 69 per cent of firms envisage that the ratio of staff to partners will increase in 2016.

The survey said: “Responses indicate that firms are taking a tougher stance on reshaping the structure of their partnerships. The need remains for firms to actively manage poorly performing partners out of the business and there is significant activity around realigning profit allocation by reducing an equity partner’s interest and the demotion of partners.”

Martin Gill, lead partner at BDO Scotland, said: “Firms are clearly taking some tough decisions and are gearing up for the future by restructuring partnerships and increasing the ratio of staff to partners whilst investing in technology to enhance the delivery of their services. More respondents are standing firm on merger discussions with many stating that they do not want to merge.”