Lawyer survey reveals drop in law firms’ economic confidence

Economic pessimism rises from 13 to 21 per cent since last quarter; regional firms expect brighter future than the City

The most recent Law Firm Business Confidence Survey has shown that, having come full circle in regaining optimism in the market at the end of the last quarter, managing partners are starting to lose confidence once again.
The research, carried out on behalf of The Lawyer by Wheeler Associates and McCallum Layton, shows that since the beginning of the last quarter, firms have expected a decline in fee income and profit growth. There are also greater fears among firms about the economic climate and the threat of recession.
The results are disappointing, as, after 12 months of doom and gloom, the market perception at the beginning of the year was beginning to look rosier, and confidence was growing.
The survey targeted 56 managing partners from The Lawyer 100 survey 2001, with City firms counting for more than half of the sample.
In March 2002, confidence in the UK economy was at its highest level since the Business Confidence Survey began in 2001, with only 13 per cent of managing partners believing that the UK economic climate would worsen in the next six months, but this figure has now increased to 21 per cent. However, 49 per cent still believe that a status quo will prevail.
Profitability predictions have taken a slight battering, with the net proportion of firms expecting their profits to increase in the next six months standing at 59 per cent, down from 67 per cent in the first quarter of 2002. Managing partners are less optimistic about the growth in their firms’ profits. Average profit growth across all firms in the survey is expected to be 6 per cent, down 1 per cent from the end of the last quarter. Provincial firms have a more buoyant outlook, with expectations for profit growth standing at 7 per cent, compared with the City firms’ 6 per cent.
Fee income, although still an area where growth is expected, is also a growing cause for concern for managing partners. The net proportion of firms which predict a growth in fees in the next six months is 62 per cent, compared with last quarter’s 77 per cent.
Average fee growth across all firms is expected to be 5 per cent in the next six months. If this is broken down into regions, once again the provincial firms are aiming higher, with a predicted 7 per cent growth. City firms are less enamoured, with expected growth of 3 per cent, down from 6 per cent at the end of the first quarter of 2002.
Last quarter, most managing partners saw corporate finance as the jewel in the crown, with firms expecting to see a 6 per cent increase in fees from this type of work. Unfortunately, this hasn’t materialised and now market perceptions are changing, with M&A deal activity down across the board in Europe. As a result of their being fewer large deals on the horizon, firms have reduced their forecasts, from 6 per cent to 4 per cent in the corporate finance arena. The magic circle firms in the survey stated that they expected to see no growth in this area in the next six months.
Insolvency and corporate recovery work, once seen as the real money maker, is now not as lucrative. This time last year, firms foresaw a 12 per cent growth in the area, which now stands at 5 per cent, although this is up 1 per cent from last quarter’s results.
Litigation has levelled out, with a 5 per cent growth expected, whereas commercial property has seen a 1 per cent increase in expected fee growth, to 3 per cent.
The fastest growing practice area of the legal market is expected to be human resources-related advice. Concerns about ever changing employment law rights and pensions law, together with more and more claims being brought by employees, has meant that law firms see this as a fast-growing and potentially profitable area.
Confidence in profit growth for e-commerce work, by comparison, has plummeted. Firms expect only a 1 per cent growth in this area, compared with 8 per cent this time last year. In line with the general mood about the economy overseas, prospects for international work have also fallen, with just a 3 per cent increase in expected fees.
Against a backdrop of redundancies and culling of staff in recent months at many firms, expected staffing level figures don’t look healthy for the imminent future. Last quarter it looked as though staffing levels were on the rise as firms anticipated a recovery, but this has failed to happen. Although half of the firms surveyed expect to keep their overall staffing levels constant over the next six months, 13 per cent of firms expect to cut their staffing levels in the next six months, up from 8 per cent last quarter. Only 4 per cent expect to slash partner numbers, while 7 per cent are looking to other fee-earners to make cuts. More firms are planning to reduce staff numbers than at any time since the Law Firm Business Survey began. The other side of the coin is that 48 per cent of firms expect to increase fee-earners and 27 per cent are looking to take on more partners.
The issues affecting law firms have changed shape this time around, and there are some mixed signals in the response. Threat of a recession now concerns 20 per cent of managing partners, when last quarter it had virtually disintegrated as a concern. Redundancies are linked with this, with concern about this issue up 8 per cent to 13 per cent.
However, fears about the consequences of an economic slowdown, namely fee pressures from clients and increased competition for work and late payment of fees, have lessened. This shows that firms have been ever more efficient in safeguarding their positions by putting measures in place to combat these immediate concerns. But the more intangible fear of recession still looms.

Average fee growth in next six months
Practice area % Q2 2002 % Q1 2002 % Q4 2001 % Q3 2001 % Q2 2001
Corporate finance 4 6 1 -4 -1
Commercial property 3 2 1 2 5
Commercial litigation 5 5 7 8 8
Insolvency/corporate recovery 5 4 10 15 12
HR-related 7 6 6 8 12
E-commerce 1 2 0 -2 1
International 3 5 4 1 8
 
Source: Law Firm Business Confidence Survey

Proportion of firms with support function
Support function Proportion with
Finance 100
Marketing/business development 100
IT 100
HR/personnel 100
Facilities/operations/admin 100
Training 91
Knowledge management 88
 
Source: Law Firm Business Confidence Survey

Proportion of support function heads on board or management
Support function % of heads at ‘director’ level % of heads with seat on board
Finance 80 73
IT 52 25
HR/personnel 50 36
Marketing/business development 48 29
Facilities/operations/admin 39 9
Training 39 13
Knowledge management 37 7
 
Source: Law Firm Business Confidence Survey