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Is this the year when the consolidation starts?

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Recent headlines have been grabbing attention “95% of top law firms predict ‘massive consolidation’ over next 2 years”.

The study, by legal PR firm Byfield Consultancy and City law firm Fox Williams, found that 95% of managing partners at the UK’s top 200 law firms predict “massive consolidation” of the legal market over the next two years. Are we really surprised by this fact?

Perhaps more importantly is what is happening to the 10,000 law firms that do not form part of the elite “top 200”.

At all levels , experience suggests that of all the takeover/merger model only 15% succeed as a business, with many breaking up and disintegrating within a short time of the merger taking place.

In the survey, only 43% of managing partners at recently-merged firms rate the majority of mergers of the last five years as a success. 21% expressly said they had been a failure, while the rest declined to answer. So how does this affect the remainder of the vast number of the profession who are seeking the ideal solution of a merger, or being acquired?

Most firms of all shapes and sizes have been “chatting” with friends and neighbouring firms about potential merger yet why have so few actually come to fruition?

Is it false expectations of the firm that needs to merge but won’t admit it? Is it lack of working capital to fund the merger? Is it the desire for the top 200 firms to consolidate with each other and not bother with the rest?

There is, however, obviously no definitive answer to those questions. As I highlighted in my previous article, firms with some degree of vision are asking for help in how to develop a strategy for merger or simply exit. There are solutions but sadly most firms will not engage and make the fundamental change to enable them to be suitable for merger.

What will happen to the thousands of firms that fall into this category?

The various commentators that supply opinion about the future of the profession are for once in some agreement – we will lose around 3000 firms that exist today by merger (unlikely), consolidation (unlikely) or insolvency (more likely). I do not wish to be the harbinger of doom but this mess cannot continue!

How can the profession build on the future whilst we are still subject to judicial reviews that affect our decisions i.e. best value tendering for criminal contracts. We are also waiting, with baited breath to see if we are to be dual regulated by the FCA and the SRA on the subject of consumer credit – decision delayed until October.

Many firms are still in the “we are a profession mode” and do not feel they are subject to normal commercial rules. The market created by the 2007 Legal Services Act desperately needs an independent examination to assess whether the reforms are working, the general consensus strongly suggesting that the answer is that they are not.

Even the Lord Chief Justice appears to be questioning the direction in which the profession has been moving. The next government, he said, will ‘have to look very carefully’ at the regulation of services, including the relationship between the Legal Services Board and the regulators.

Perhaps we simply have too many regulators fighting for the same space?

We have seen a massive expansion in the population of lawyers during the past twenty five years with the number tripling, so why haven’t we seen prices from solicitors coming down? It is the new entrants, ABSs not regulated by the SRA that seem to be driving down the price for legal services.

This raises the question of whether the market created by the act is operating correctly. ‘Is the profession’s structure and fee structuring working to produce legal services in a way that people can afford?’

Let’s assess the conveyancing market – one of the major revenue earners for most independent law firms. The lenders and insurers are deeply concerned about risk and firms will be assessed by their ability to manage process and their people. Many law firms will fail this test and I suspect the lenders will end up controlling the majority of this sector. If you do not deal with the parameters they will dictate then you will simply not be on their panels.

This lack of commercial awareness and a desire to return “to the good old days” is extremely worrying for all law firms never mind the top 200. Consolidation and merger and sadly insolvency has to increase within the profession and I sincerely want firms to engage with specialists to avoid the latter situation occurring.

Viv Williams is CEO of 360 Legal Group and specialises in advising law firms in merger, consolidation and exit planning