Small Law Firms Face Tough Times

Small Law Firms Face Tough Times In Market Downturn

LawFuel.co.nz – Legal Jobs & Newswire - It can be a lonely time running a small law practice, but there are some steps their principals can take to help weather the storm

Although many may believe law firms survive and prosper in good times as well as bad, the reality is that many face a tough time in the ongoing economic turmoil and some will not survive.

Already the now infamous property downturn has taken its toll on both small firms and large, with the smaller High Street conveyancing practice bearing the brunt of the slowdown. Recruiters are seeing legal executives and solicitors who worked in property seeking jobs after being released from their small firm employers.

Unlike the large law practices who can rely on the uptick in infrastructure, construction, climate change, regulatory and other work, the small firms rely on their foundation of residential and small commercial property transactions.

Certainly the large firms have suffered from the drying up of major financing, banking and equity transactions, but they have enough fat and management nous to work their way through the deepening recession. Not so for most smaller firms, although some are particularly well managed and have the ability to scale back their overheads. Many, however, do not.

The drying up of the second-tier financing and sharp reduction in bank lending has crushed the ability of small firms to develop their transaction-based fee income while fixed costs means they’re operating at either significantly lower profitability or at a loss.

The new regime under the Lawyers and Conveyancers Act has now placed some additional burdens and competition upon them and there is likely to be higher professional indemnity insurance costs, sources have told LawFuel.

There is a sharp divide now between firms that are well managed with tightly controlled costs as well as their “WIP” (work in progress) and debtors. Clients who are themselves experiencing problems will also tend to take advantage of slack billing practices by delaying payment, thus further affecting the firms’ cash flow.

Although some firms regard WIP and debtors as cash, they are not able to be used to pay overheads. And no-one, it seems, can rely on the banks any more particularly as credit lines are reduced and significant margins over base rates are charged. Requests for working capital or distributions are likely to ring alarm bells for the banks.

But there are certain steps the small firm can take to immunise themselves against the current tough market conditions.

The reality is that in tough times the tougher firms will not only survive, but some will prosper and set the template for future growth. There will be mergers, an obvious development in a market that is over-served by law firms with a plethora of some 1600 practices nationally. The law profession is totally unconsolidated, as it is in Britain and Australia.

English law practice consultant Tony Williams, a former managing partner with Clifford Chance and Andersen Legal, said in Britain there is a pronounced lack of consolidation in the law business.

“Many firms have underinvested in IT, recruitment, training, marketing, internal systems and their brand. A degree of consolidation should help to create more robust and balanced businesses capable of surviving this turmoil and then thriving as the markets recover.

ends 

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