Troubled times for North West law and accountancy firms

Professional services firms – sometimes considered the safest and most stable types of business – actually have the highest risk of insolvency of any sector in the North West of those tracked by insolvency and restructuring trade body R3.

New research from R3 shows that in November, almost half (48%) of the North West’s professional services businesses – which include accountancy, law and consultancy firms – are at higher than normal risk of insolvency in the next 12 months.

There is now a clear gap between professional services and the IT and technology sector, the next riskiest sector monitored by R3, in which 44% of businesses are at elevated risk.

It says that both sectors contain innovative, early stage-businesses, however many professional services practices are sole practitioners whose business models may be more dependent on a smaller number of customer contracts, and hence more exposed to market volatility.

New technology and the need to keep pace with a changing business world also added to the challenges in these sectors.

Paul Barber, North West Chair of R3 and a partner at Begbies Traynor, said: “The figures clearly indicate that professional services firms are starting to feel the impact of disruption.

“New technology is reducing demand for skills in some areas, while new private-equity backed business models are challenging the old, partner-led firms.

“Meanwhile, clients are becoming more demanding, and quicker to claim in the event that things go wrong.

“Of course, many firms continue to be very successful, but may be finding it harder to sustain their profit levels and are restructuring teams or trying out new employment models in an attempt to keep up.”

He added: “Professionals have long been trusted advisers to business, and the risk is that the current changes could result in the loss of valuable expertise and personal service.”

R3’s figures show that in terms of sectoral risk scores, construction came in third place with 42% of businesses at elevated risk, followed by agriculture (40%), transport (39%), retail (36%), manufacturing (35%), tourism and hotels (both 33%), pubs (30%) and restaurants (29%).

Overall, 42% of businesses in the North West are considered at elevated risk of insolvency in the next 12 months – equivalent to almost 159,000 firms.

The R3 survey is echoed by research that reveals law firm partners’ concerns over a ‘war for talent’ and the threat of regulation and risk management.

Chartered accountants Saffery Champness has published its inaugural benchmarking survey of law firms, in partnership with The Institute of Legal Finance & Management (ILFM).

It reveals that although average revenues are increasing, regulation and risk management continue to represent key challenges for law firms as does retaining top quality talent – with 84% of law firm partners citing talent retention as being among their top three business challenges.

The survey found that in a year characterised by political and economic uncertainty, there are encouraging signs across the sector. Average revenues of surveyed firms increased in 2019 as respondents saw a median fee growth of 6.7%, with median fees per partner increasing to £696,000. Most firms surveyed reported growth across multiple work types.

The pressures around achieving satisfactory profitability from increased fees, and also converting fees into cash, continue to be key issues, with working capital management a high priority for all successful firms. The survey also showed an improvement in how quickly firms are converting work done into cash.

However, cyber security and fraud protection was a key concern for respondents, with 30% considering it to be their greatest challenge.

With the launch of a simplified set of Accounts Rules which place more emphasis on ensuring robust client money controls, alongside the ever-increasing risk of cyber-attacks and fraud, firms are facing a perfect storm of regulatory and risk issues impacting on day-to-day fee earning activities.

With GDPR now well into its second year, mitigating risks around data use and protecting the large amounts of sensitive information held by firms continues to be a key priority.

Finding and maintaining a positive work/life balance for staff is key to a productive work force and the legal profession is no exception. When asked what was an important consideration in looking for a new job, more than 40% of respondents cited this as their primary consideration, more than double the number of those who put salary first.

Mike Hodges

Flexible working was also a key factor and this gives a strong signal that, in the war for talent, those firms that embrace the technology and attitude to adopt flexible working styles will be the ones who attract the star players.

Mike Hodges, head of the Manchester legal sector group at Saffery Champness, said: “Law firms have faced years of financial, operational and regulatory challenges, and there doesn’t appear to be signs of that slowing down any time soon.

“The legal sector is a prime target for cyber criminals who are not only interested in law firms’ client accounts, but also the sensitive data that most of them hold, and firms are well aware of what happens when they let their guard down.”

Tim Kidd, ILFM chief executive, added: “The legal sector is notorious for its long hours. However, firms have to be willing to change and adapt to survive, particularly when it comes to changing working practices.”