Legal Business

Sponsored briefing: Celebrating the successes of the legal sector

Sponsored briefing: Celebrating the successes of the legal sector

Ahead of the 2020 Legal Business Awards, James Tsolakis of NatWest reports on the past year’s developments for the profession

As the deadline for the 2020 Legal Business Awards entries closes, there is much to reflect on and celebrate in the UK legal sector. Once again, NatWest is delighted to be the headline sponsor of the awards and recognise the success of the legal sector as it continues to support major global transactions, reshaping the commercial world domestically and internationally.

Legal Business

NatWest SME law firm report warns lock-up a concern although business climate positive

NatWest SME law firm report warns lock-up a concern although business climate positive

With an average revenue growth of 5% in 2016, the business climate for small to medium size (SME) firms with income under £123m in the UK has been generally positive, according to the latest NatWest Legal Benchmarking report out today (30 March).

The report, which surveyed 269 firms, states that firms should look to reduce their lock-up, which, at an average of 113 days is now longer than at any time in the last five years and four days longer than last year. The research suggests that without a constant flow of new matter starts and paid fees, firms would on average run out of cash within 40 days.

NatWest’s head of professional sectors Steve Arundale said: ‘Lock-up at firms has slipped which confirms that busy lawyers aren’t very good at collecting their fees. Forty days is significantly less than most people would think, and firms are great at posting profit but not as great at managing their cash position.’

Issues around productivity are also highlighted, as firms are focused on coping with ‘increased workload’ and taking on more headcount. This is shown through a reduced net profit at 23%, the lowest throughout the history of the report.

‘However small to medium size firms are in pretty good financial shape on the back of some very positive years post-recession for revenue growth, as PEP is growing too,’ added Arundale.

Eversheds Sutherland managing partner Lee Ranson said: ‘I agree with the report’s generally positive outlook. Specifically, the market did hold up much better than people expected post-referendum. However, there is a degree of uncertainty, and I think this is starting to be felt in certain areas so that people are cautious, particularly around new investment.’

The report suggests that as firms get larger they find it increasingly difficult to manage lock-up, with the average length for small firms (revenue under £2.25m) at 84 days, for large firms (£2.25m-£10m) it is 131 days and for very large firms (£10m plus), it stands at 142 days.

Ranson (pictured) added: ‘I feel certain that if we sat our clients in a room and showed them these lock-up statistics they would be very surprised that as a profession we allow these averages to occur. Clients want us to be more efficient and part of helping us achieve that is to run ourselves more efficiently as businesses.’

Arundale said that billable hours figures show productivity is still relatively low. He added: ‘Our advice to firms is to focus on improving that number of billable hours before rushing out to recruit more headcount to service revenue growth’

Looking ahead, 36% of firms surveyed expect their bank balances to improve compared to 46% last year, while only 11% expect their balances to fall.

Meanwhile, 63% believe that fee income will grow over the next year, down from 81% in 2015 and 43% believe that margins will improve in 2017, 2% less than last year.

‘Confidence is generally still good, firms think life will be okay. Confidence dropped slightly from the previous year and as a result feedback is coming through, but when I’m out in the field, many firms are still very busy which I find encouraging as there doesn’t seem to be a specific Brexit issue in SME domestically-focused firms,’ Arundale concluded.

georgiana.tudor@legalease.co.uk

Legal Business

Tough times ahead for real estate, capital markets and M&A, says latest NatWest report

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Real estate, equity capital markets and M&A practices are expected to slow down significantly in the year ahead, despite UK law firms continuing to be highly profitable and a significant contributor to the economy, according to NatWest’s latest ‘Perspective on the Legal Market’ report out today (8 November).

The report also states that litigation and debt finance are to remain ‘relatively buoyant’ while the fast-changing regulatory landscape is generating premium advisory mandates for the top players.

Commenting on the findings, NatWest’s head of legal sector and author of the report James Tsolakis said: ‘If there is one thing lawyers dislike above everything else, it is uncertainty. However looking at the current marketplace and how the firms are responding to this prolonged uncertainty and the activation of article 50, it’s likely to be quite a litigious, contentious period ahead as clients of law firms are repositioning themselves and trying to define their commercial interest.’

Herbert Smith Freehills (HSF) corporate partner Gavin Williams (pictured) agreed: ‘In certain sectors, we expect to see a slowdown in M&A activity inbound to the UK until the terms of the UK future relationship with the EU become clearer. This will particularly affect heavily-regulated sectors, such as financial services, with high degrees of European harmonisation. In other sectors, countervailing factors such as movements in the value of currencies and the consequential effects on demand and profitability may have something of a re-balancing effect.’

However many prefer to focus on the opportunities arising out of Brexit, such as Shearman & Sterling’s head of global financial institutions Barney Reynolds, who reiterated that ‘It is possible to see opportunities from the changes Brexit brings with it and to help with those. A lot of discussion has been very negative.’

According to Natwest’s report Brexit will mean redundancies in the short term are inevitable as firms grapple with pre-referendum rates, lower instruction volumes and increasing costs and tightening margins. However Brexit is expected to create a whole new industry for firms to focus on, as clients, governments and regulators seek guidance on how best to navigate the complex legal challenges ahead, including moving their headquarters to other European financial centres.

georgiana.tudor@legalease.co.uk

Legal Business

Tough times predicted for mid-tier firms, says NatWest report

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Law firms across the UK with revenues below £46m ‘should expect tougher conditions in 2016’ despite generating a 6% increase in average fee income last year, according to NatWest’s latest Legal Benchmarking Report.

The research, now in its fourth year, looks at the performance of law firms operating in the SME space with revenues below £46m and saw over 390 firms take part. The results showed ‘healthy improvement in both revenue and profit levels’ as fees grew on average by 6% in 2015 – considerably above inflation. Confidence levels remain ‘strong’ despite dipping slightly for the next year with 44% of firms predicting fee growth to rise by 10% in the next year, compared to 56% last year.

In terms of average fee growth, there was some regional variation with London achieving 10% and the North East and North West reaching 4%.

Those firms within the 2015 edition of the LB100 with revenues below £46m range from those ranked from 63rd onwards, including Lewis Silkin, Howard Kennedy, Forsters, Capsticks, Bristows, Winckworth Sherwood, Kingsley Napley, Veale Wasbrough Vizards and Harbottle & Lewis. Those specialist firms and focused City firms in the second 50 of the LB100 thrived in what remained an uncertain market last year, according to our research.

NatWest head of professional services Steve Arundale said: ‘2015 was another positive year for firms, with most measures of performance continuing to improve. However, this is at a slightly slower rate than we saw in 2014. Early indications suggest that 2016 could carry some performance challenges for many firms. Business levels witnessed in 2015 could be described as the new, post-recession norm; and many firms appear to be struggling to deliver growth levels achieved in the previous two years.’

However not all agree with the findings. Forsters managing partner Paul Roberts (pictured), whose firm enjoyed a 14% uptick in revenue to £41.4m while profit per equity partner rose 11% to £539,000 – reflecting buoyant conditions in the City and private wealth sector – told Legal Business: ‘We have had a great year. Everyone expects some uncertainty with work levels because of the upcoming Brexit referendum but generally the work is there, not least because we’ve witnessed continued consolidation by mid-tier firms in the last couple of years. I don’t predict majorly tough times.’

Arundale concluded: ‘Although growth appears to be slowing to a new operating norm, firms still have a great opportunity to maximise their operations and prosper. Leaders need to make sure they are asking the right questions around operating efficiency, performance and reward and taking proactive steps towards investment around technology benefits.’

sarah.downey@legalease.co.uk

For more on our annual financial data, see ‘The LB100 2015 – Through the looking glass’