With Cobbetts entering into administration, are we likely to see more law firms in trouble this year? Why?/Why not?
LISTEN UP
‘Market pressure to deliver value for money and clear differentiation will spell trouble for some and opportunities for others. This year will be a year to listen to clients and respond: not to spend too much time facing inward. Firms that are able to change will make progress. A flexible and tightly managed cost base will be essential. Differentiation will entail finding a clear market segment and serving it really well. Some firms may need to shrink (painful and costly) or grow (possibly by merger) to do that. None of this is easy or risk free, self-evidently.’
Charles Martin, senior partner, Macfarlanes
MERGER CURE
‘It is highly likely that we will see more firms in difficulties in the months to come. A combination of the economic climate, enhanced regulation, increasing overheads and nervous funders will inevitably take its toll. However, whether another major player will fail entirely is more debatable as solvent consolidations may avoid such situations.’
Peter Jackson, managing partner, Hill Dickinson
TRANSACTION TROUBLE
‘Law firms are in no different position to any other commercial enterprise. Just because we’re professional practices, we’re not immune to difficult economic situations.
Put simply, law firms do business because their clients do business. Their clients aren’t doing business because they haven’t got the money because banks aren’t lending.
It’s not therefore surprising that firms that are significantly transaction-based are going to be struggling. It’s a virtual storm because all these pressures come at the same time because you’ve also got a huge squeeze on margins because clients are demanding more work for less money. If you put all of these things together there are going to be a lot more problems for law firms out there.
The most remarkable thing of this recession is that staff have been prepared to take the hit with reduced pay.’
Guy Stobart, chief executive, Kennedys
NO DIFFERENCE
‘There will be other firms that get into difficulties. Firms that have over extended in terms of borrowings and over expanded in a period of greater optimism. They also paid out too much of the profits to partners.
Law firms aren’t so different from governments and businesses. Those law firms that have got too much into debt must have an austerity programme, which is going to be unpopular with partners. This could lead to high-performing partners leaving to go somewhere else where there isn’t such a severe austerity programme. This combination of high debt and reduced drawings could in time lead to a run on the firm.’
Quentin Poole, senior partner, Wragge & Co
DEBT PROBLEMS
‘Most law firms are high fixed-cost businesses, so if you’re not careful in monitoring your fixed costs and if you find your turnover dips and you cannot or haven’t responded, you can get into difficulties. Those firms that have borrowed heavily are also more prone to distress because the banks are not terribly sympathetic at present. Indeed, with what has happened to Halliwells and Cobbetts, the banks are likely to get more difficult if firms start breaching their covenants.
The word in the market is that there are a number of firms that are in business support with their banks. In those situations where there are no signs of any improvement in the market, any dip in activity levels is highly likely to result in those firms getting into serious trouble. A lot of the current merger activity is, I believe, driven off fear.’
Ian Gilbert, managing partner, Walker Morris
MORE CASUALTIES
‘As tough market conditions continue, I fear there may be more law firm casualties. Those firms that are slow to or fail to adapt to address the challenges law firms face particularly put themselves at risk.’
Sharon White, chief executive, Stephenson Harwood
GOOD VARIATION
‘It depends on what the firm specialises in and depends on the business model. Some firms, for example, are specialised in narrow areas of the law. If that area is susceptible to the current difficult economic conditions and/or a large part of fee income is reliant on a small number of large clients, that firm is going to have difficulties hedging itself in the downturn. Typically, in a downturn a firm with a restructuring and insolvency practice can hedge the corporate and banking practice with corporate and banking lawyers turning their hands to restructuring matters. As you come out of the cycle, litigators tend to get busier. However if you’re a firm with only a narrow area of expertise or type of business then you may struggle in the downturn unless you are extremely strong or extremely lucky.’
Philip Hertz, restructuring and insolvency partner, Clifford Chance
HEDGE YOURSELF
‘The business environment in which legal practices are acting is undergoing a period of fundamental change. When that happens you find that there are particular business models that may have worked well in previous circumstances but cease to work well in changed conditions. That is true of the legal practice sector but it is not unique, in fact it’s simply a fact of life in any market. Legal practices are as vulnerable as any other forms of business to changed market conditions.
To a degree firms can hedge themselves with certain practice areas. But it is very difficult to structure a legal practice or any other type of business in such a way that it is immune to an economic cycle.’
Hamish Anderson, insolvency partner, Norton Rose
IMMEDIATE THREAT
‘Cobbetts is more concerning because the events are less dramatic than Dewey & LeBoeuf and Halliwells. It is more about difficult trading and the issues that this entails. It’s a firm that was trading but struggled to deal with the new financial climate that we are all in and as a result the problems have just got too big. To have a failed merger implies that the problems were just too big for someone else to take over and deal with.
Cobbetts has the potential to be the first of a number of law firm failures, although I wouldn’t say many. It highlights that firms in a Cobbetts-type situation either need to do a merger or find another way of dealing with the issues. It’s a difficult scenario but at least most people have got a job at the end of it so not a bad outcome for the individuals at the firm but not so good for the creditors.’
Colin Ives, private client partner, BDO