What do finance directors view as the most significant threats to commercial law firms’ profitability in the year ahead, and conversely, what are the key areas of growth?

Thomson Reuters recently posed these questions, among others, to finance directors at some of the top 100 law firms in the UK in an annual survey.

The survey, the seventh Thomson Reuters has conducted, seeks to shed some light on the key strategic questions facing finance directors and their firms. As in previous years, we asked:

  • What measures are their firms likely to take in order to improve profitability going forward?
  • Which practice areas do they expect to grow and which to contract?
  • Whether they plan to change their business in response to the Legal Services Act, and what financing options they think are suitable for law firms?
  • Which overseas regions (if any) offer the best expansion opportunities for UK law firms and which are least attractive?

The findings reveal a growing demand from clients for fixed-fee work as an increasing concern, with 48 percent of respondents now seeing this as a high risk. For the fourth year running, finance directors also said that downward pressure on fees from clients is the biggest threat to law firms’ profitability, and concerns are growing – 76 percent now say this is a high risk.

Worries over the creditworthiness of their clients appear to have fallen away this year, with 21 percent citing credit worthiness as a high risk in 2011, compared to none of the respondents this year. Further improvements to credit control do, however, remain the top priority for 71 percent of finance directors, followed by increased cross-selling opportunities (67 percent).

The survey also revealed that half of respondents expect to expand into new service lines, although despite the economic recovery a significant proportion (42 percent) thinks it is likely that they will cut unprofitable services.

The good news for law firm employees is that staff costs do not appear to be widely targeted as a means to boost profitability, and lawyers’ pay and bonuses look set to remain unscathed, with 79 percent saying they are not planning freezes or cuts.

Key areas for growth over the next year are in regulatory and compliance work (top choice for the second year in a row) and the energy sector, according to the respondents.

When it comes to funding for law firms, finance directors continue to raise doubts over the use of the stock market and private equity as an appropriate way to fund law firms. Ninety-six percent of finance directors now view listing on the stock market as inappropriate for law firms, and 92 percent think private equity is also unsuitable. Bank lending, it appears, continues to be the preferred choice.

So what does all this mean? For law firms and finance directors the results of the survey will likely mean a continued focus on the factors that enable them to deliver services more efficiently and with more predictable costs.

Ensuring the flow of communication between a law firm and their client is as smooth as it would be with an in-house team, such as providing the client with a regular stream of management information and updates on matters that they are handling, will also remain an imperative.

For law firms with forward-looking finance teams willing to adjust to the new market realities outlined in the report, and with the right operational or technological resources to support information flow, the future looks bright.

To request a copy of the report, please click here.