Deloitte survey: growing number of large firms preparing for ABS conversion

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Mergers: more talks between equals

The growing interest in alternative business structures (ABSs) among large law firms has been highlighted by another survey, with 46% of those polled saying they are likely to use the ABS regime in the next three years.

The poll by Deloitte and Winmark said the most notable change compared to 2011 is the proportion that are ‘very likely’ to convert, which was up to 23%.

It showed that of those preparing for ABS, half had either planned or implemented a corporate-style executive committee in preparation for the move, equity partner status to non-legal staff and non-executive director positions.

Some 27% had either planned to enable or had enabled a share ownership scheme for non-partners, while 18% were changing the voting structure of the partnership.

The survey canvassed views from 42 professional services firms, of which three-quarters were law firms, and ranged from practices with turnovers of less than £20m to those with more than £500m. On other issues, it found that nearly three-quarters of those surveyed reported having been in merger or acquisition talks in the past 12 months, although there was a notable shift in the kinds of deals being contemplated.

In 2011, 81% of those involved in merger discussions wanted to join with a smaller firm. This year the figure has fallen to 52%, with 24% wishing to embrace businesses of a similar size and another 24% seeking opportunities with larger firms.

There was also evidence of growing optimism regarding the economic outlook for the coming year, with 74% expecting growth in comparison to 37% last year.

Deloitte partner Jeremy Black said: “The change in attitude towards merging with bigger competitors only serves to highlight the ‘survival of the fittest’ reality that faces elements of the professional services sector. Previously, most firms favoured amalgamating with a smaller peer, retaining management control and their name.

“However, in a market where supply continues to outstrip demand, consolidation is both essential, imminent and is forcing some firms to reconsider their approach. Consolidation is one way to expand the client base and also deepen specialist knowledge – whether that is in an industry focus or a practice area.”

Growth from international expansion is also expected, especially in the emerging economies. The report reveals that 30% of managing partners consider the greatest growth opportunity to lie in overseas work, compared with only 17% last year. However, the route to international growth is likely to be a conservative one, with over half of respondents expecting to expand their global footprint through strategic placement of UK partners, rather than an overseas acquisition.

Alex Wright, head of research at Winmark, said: “The primary focus for leaders of professional services firms for the next 12 months is growth. Seeking out opportunities through better client engagement and international experience are central to this. The crisis in the Euro Zone is seen as the greatest single threat facing the sector (41% now feel that way), meaning that firms must look to the more challenging emerging markets where the risk and rewards are greater.”

Whilst growth is predicted, it remains moderate in comparison to the increases characteristic of the pre-recession period. Slower rates of growth result in fewer promotion opportunities, meaning the route to partnership is less accessible for many juniors. This presents law firms with the challenge of finding new ways to keep staff content.

Mr Black said: “Two-thirds of respondents thought staff morale had fallen in their businesses this year. Managing partners must tackle this. If promotions are limited, there are alternative ways to improve career prospects for staff and boost morale, including training, flexible working and providing individuals with international experience.”