Special report: Ireland
23 September 2013
23 June 2014
20 January 2014
8 August 2013
16 June 2014
A new survey shows positivity is trickling back in to Ireland’s legal market as a recovering economy draws work their way, even in the notorious property sector
Ireland’s efforts at hauling itself out of the pit of financial crisis have been praised by politicians and economists. The measures swiftly taken by the country’s government to deal with the 2008 crash have taken some time to filter through to the economy but the latter half of 2012 showed some real improvement, with three successive quarters of GDP growth.
Happier new year
The economic statistics are leading to positivity on the ground, including among the legal community. In late 2012 consultancy business Smith & Williamson carried out a survey of the Irish legal profession to gauge its views on the market environment, financial management and regulatory changes.
This found law firms overwhelmingly positive about the outlook for 2013. A quarter of the 93 firms responding said they expected to see an improvement in the legal market this year, while 45 per cent predicted stability. The remaining 30 per cent of respondents were more gloomy, predicting a deterioration in the market, but this compared favourably to the 43 per cent expecting the same for 2012.
Law firms themselves have solid evidence of an uptick in work, especially - and perhaps surprisingly - in property.
“Interestingly, property and local banking work is growing quickly for us,” says Dillon Eustace corporate head Lorcan Tiernan. “We expect these areas to grow significantly over the next couple of years. There’s a lot of interest from overseas clients in Irish commercial property because it’s getting cheaper and they can see the value in it.”
“Happily, we’re seeing a lot of interest in and instructions from the Irish market at the moment,” says LK Shields managing partner Hugh Garvey, backing up Tiernan’s observation. “We’ve seen a lot of big domestic and non-domestic clients starting to become more active in the market in the past six months or so. The return you can get out of good commercial property with a good tenant at the moment is internationally attractive. Some good commercial properties are selling at 70 per cent of the price they were last traded at.”
At McCann Fitzgerald chairman John Cronin says this pick-up in property work is also being seen by Ireland’s largest firms, notably in loan sales and property portfolio acquisitions by significant overseas investors. He points to the June acquisition of GE’s loss-making Irish mortgage business, GE Capital Woodchester Home Loans, by Australia’s Pepper Home Loans for $188m (£117m) as an example.
Matheson managing partner Liam Quirke agrees that loan sales and portfolio sales is the main area of property work for the larger firms at present.
“It’s not so much property transactions - it’s a connection with the deleveraging of the banks’ balance sheets,” he explains.
The work is also flowing through into residential property, according to Byrne Wallace managing partner Catherine Guy, who adds that the rate at which activity levels are increasing is “not ginormous” but is definitely evident.
Smith & Williamson Dublin managing director Paul Wyse agrees that property is one area of work which is on the up at the moment. Wyse says real estate agents he and his colleagues have spoken to have also remarked on this.
“People are getting good value for money now and they’re afraid that if this thing takes off and banks start lending again, they may miss out on an opportunity,” he says.
Turnover under pressure
However, despite the fact that transactional activity is increasing again and 87 per cent of respondents think their own firm will have a stable or improving year, all is not rosy in the Irish legal garden.
According to Smith & Williamson’s survey results, 55 per cent of firms expect a decrease in turnover in 2012 and only 10 per cent a rise in revenue. Smaller firms are hardest-hit, with 74 per cent saying their revenue would be stable or decrease in 2012 compared to 2011.
Larger firms are worse off than medium-sized ones. Half of Ireland’s top 10 firms responded to the survey, and two-thirds of them said turnover would be stable or drop. In contrast, 62 per cent of mid-tier firms said their revenues would rise.
The pressure on turnover is largely due to continued fee pressure from clients. A massive 75 per cent of the firms surveyed said this was the number one issue for them over the next 12 months, a figure supported by anecdotal evidence from lawyers.
“The conversations around fees are tougher for us than they might have been a number of years ago but I think that’s a universal issue. Clients are constantly looking for value for money - they’re focusing on efficiency and a good return on their spend,” says Tiernan.
Garvey agrees with the survey’s finding that fixed fees are becoming far more common.
“They’re more prevalent now than they were five years ago and I think most people are reasonably comfortable with them at this point in time,” he says.
“Undoubtedly there’s pressure on fees,” adds Guy. “This was led by Nama [the National Asset Management Agency] and, by extension, the banks. It wasn’t a surprise that they were going to try to put pressure on fees, and the market, to some extent, has followed.”
Wyse backs up Guy’s point about the impact of Nama, which has instituted fixed-fee arrangements for its extensive panel of law firms. Irish lawyers say that not only are the Nama fees low, but the agency is prone to pushing them down further where it can.
According to Wyse, 83 per cent of the large firms responding to the survey and 92 per cent of mid-tier firms have reported increased use of fixed fees in the past year.
Garvey says there are definitely risks in chasing work at low prices just because it is work.
“There’s no doubt that there’s plenty of work out there but there’s also no doubt that a good proportion of that work is high-risk and low-margin,” he says. “If you’re doing too much of that you can change the focus and set-up of the firm fairly quickly, and get over-concentrated in an area of the market that may not be positive for the firm,” he warns.
The differences between small firms and larger ones, and regional practices and those in Dublin, are becoming more accentuated, lawyers think.
“There’s a concern that the economy could split into Dublin versus the rest of the country,” says Tiernan. “I’m not sure if that will happen, but there’s no doubt that Dublin is recovering more quickly than the rest of the country.”
He thinks that corporate and commercial firms have an advantage in the present market.
“We’re lucky in that our client base pays us - maybe that’s the nature of having a corporate client base,” Tiernan muses. “I wouldn’t say we’re doing more fixed fees. Clients are looking for quite detailed upfront estimates, but are they nailing us to the wall for capped fees? No.”
Cronin points out that international clients are much less concerned about the cost of their legal advice than domestic clients.
“The difference between Irish rates and overseas rates is significant,” he notes.
Irish law firms have always been fairly reticent about their finances, with just one of the big firms (Mason Hayes & Curran) disclosing turnover, but the survey reveals some interesting trends and facts about the way firms are managed financially.
For example, 81 per cent of firms cut operating costs in 2012, in a continuation of their efforts to improve profitability.
Wyse says cost-cutting is skewed towards smaller firms, which are less able to gain from economies of scale. As a result, 38 per cent of firms say profits will be up in 2012 and only 23 per cent predict declining profits. Discretionary profit distribution is becoming more common, says Smith & Williamson.
Working capital management is evidently also proving a challenge in Ireland. While many of the top 200 firms in the UK keep lockup - debtor days and work in progress (WIP) - to around 110 days, depending on the type of firm, two-thirds of the survey respondents in Ireland said their lockup was over 120 days and 43 per cent had lockup in excess of 150 days.
Wyse says Irish firms have often had a long lockup period, but admits he is surprised by the number admitting to over 150 days.
“[Irish] firms traditionally would have had high lockup,” he says. “It’s one of the thing they’ve improved on during the recession.”
Over a third (37 per cent) of firms say they have seen an increase in bad debts over the past 12 months.
However, Irish firms are clearly careful about their borrowings and cashflow. While a significant majority, 69 per cent, had some bank borrowing, for over half of these the level of debt was less than 20 per cent of annual turnover.
Few firms have increased their working capital facilities in the past three years. Only one in four applied for an increase, and while one in five have been offered increased working capital facilities, just over half of those firms have actually accepted.
Wyse says the figures suggest firms are being “quite prudent” with their finances at the moment, and lawyers agree that financial management is a key issue.
“We’ve always been conservative in a number of things, including our finances,” says Garvey, revealing that LK Shields has “never had bank borrowings”.
“That’s been of great benefit to us - you have to manage cash. For a number of years we have been operating on a basis of monthly billing,” he continues.
“We’ve done some cost-cutting over the year but not on a continuous basis,” adds Guy. “There’s much greater financial discipline. We’ve always managed our cost base extremely closely.”
Quirke thinks the same is true for larger firms.
“Managing costs and the discipline of good financial management would be very much to the fore,” he says.
Despite firms finding the going tough financially, Ireland has not yet seen any of the rampant mid-market merger activity that has become a feature in the UK. There was just one merger of any size in 2012, that of Beauchamps and PricewaterhouseCoopers’ associated legal firm Lanswell at the start of the year.
However, a majority of survey respondents think there will be an increase in merger activity in 2013, mostly among small and medium-sized firms, despite the fact that less than a quarter of firms have approached another firm or been approached with regard to a merger in the past two years.
Garvey says that at the height of the boom, LK Shields looked at whether a merger would be right.
“We had that debate at the height of the economic activity,” he says. “But there are plenty of specialists out there that do tremendously well. Focusing on quality rather than size is how we finished that debate internally.”
Guy says she has “no sense” that there will be a wave of merger activity, although the possibility has always been there.
“Over the years we’ve had many approaches,” she says. “I’d be surprised if there were any reasonably-sized law firms that haven’t had approaches.”
However, Cronin and Quirke are both confident the Irish legal market will consolidate in the small and mid-tier.
“The leading Irish law firms have grown significantly in size, the gap between the top tier and smaller firms has widened and we would like to see more consolidation,” Cronin says. He would like to see the Law Society of Ireland encourage more mergers.
Meanwhile, Quirke says the crisis has had a big impact on many practices and so consolidation could help their recovery.
“There’s a real push by these firms to get into the sort of activity that the bigger firms are involved in and they see specialisation as the way to do it,” he comments. “I do think, though, that if you look under the hood of the various Irish firms, their make-up is very different from what it was five or six years ago.”
The structure of Irish firms could change yet further. The country’s legal sector is set for change, with the Legal Services Bill currently moving - slowly - through the legislative process. Many hope that in future the government might also give law firms the chance to become LLPs, as in the UK and the US. Almost all respondents, a whopping 94 per cent, said they thought limited liability should be allowed. Only 2 per cent said LLPs should not be allowed, with the remaining 4 per cent unsure.
Guy says she would welcome the chance to operate as a more corporate structure, while Quirke is strongly in favour of such a move.
“Nine years ago I was pushing hard for LLPs and LLCs, and I got absolutely no traction,” he says. “Bring on the competition, I say.
Allow us to conduct our business - albeit regulated - in the same way every other regulated business is allowed to conduct its business.”
Sadly, the Legal Services Bill does not include a provision for LLPs, and lawyers are divided over how much change the legislation will actually cause. Among the provisions is the creation of an independent regulator for the legal profession and removal of the monopoly on legal professional training.
The majority of survey respondents said they were familiar with the proposals. Almost half (42 per cent) said they expected the bill to cause significant change, another 45 per cent said they expected slight change and 13 per cent said it would cause no change to the profession.
But the legislation could take some time yet to become law and in the meantime firms are looking forward to 2013. For the large firms, the outlook is good with reservations.
Cronin believes that Ireland’s top firms will be focusing on maintaining their position in a continuing fragile economy. Quirke, meanwhile, says Matheson is pushing hard at its international client base - which now accounts for 80 per cent of the firm’s revenue - and plans to build on that strategy.
“I think it’s really important that we have a strategy and we stick to it. Strategy means saying no, it means prioritising certain clients and certain activities,” he affirms.
In the medium-sized firms, there is confidence that financial growth can be achieved.
“We’re targeting growth and I’m absolutely positive that we’ll reach it,” says Guy.
At Dillon Eustace, Tiernan says further recruitment is likely as well as boosting the firm’s international profile following this year’s launch in the Cayman Islands. Backing up one of the survey findings, which suggests that firms are putting more money into marketing, Tiernan reveals this is a key part of the firm’s strategy.
“That’s a strategy we’ve always aggressively pursued. We’ve never taken the work for granted and that probably comes from the fact that we’re a relatively new firm compared to the established firms in the city. We’ve grown from an entrepreneurial culture here in the practice; there was never an occasion when we opened the doors and the work just came in,” he says.
Garvey puts the future for LK Shields in the context of the improving economic environment.
“Last year has shown what we believe to be the foundations for some good economic progress in Ireland. I do see more on the transactional side, I see more on the banking side and it’s not just the burying-the-dead type banking,” he says.
“More constructive stuff is happening out there and I think there’s a realisation both nationally and internationally that there’s now some good value to be had in Ireland. In the latter half of 2012 people have started to exploit these opportunities, and that will continue in 2013,” he adds.
The challenges facing Irish firms have not gone away but the outlook in the market is certainly more positive than it has been for a while. As Quirke concludes, Ireland is now in a “new reality” and while things are more competitive, there are plenty of opportunities for businesses and their advisers.
Key figures: Ireland
GDP (current US$, 2011): 217.3bn
Annual inflation (November 2012): 0.8 per cent
Population (2011): 4,487,000
Life expectancy at birth: 80
Unemployment rate (November 2012): 14.6 per cent
Source: World Bank, Central Statistics Office Ireland