Expectation of further insolvencies in Scottish legal sector

Among the high profile casualties from the sector in recent years are Tods Murray, which fell into administration last year before being acquired by Shepherd and Wedderburn, and Semple Fraser which was put into administration in 2013 with many of its lawyers leaving for other firms. High street law firm Ross Harper ceased trading in 2012.

The worry over further failures in the sector was slightly at odds with a generally brighter outlook from the BDO research with 69 per cent of participants reporting higher fee income in the first half of the 2014/15 financial year.

No firms expect profit per equity partner to fall with 64 per cent expecting an increase and remainder indicating they were likely to remain at a similar level to the prior year.

The trend for consolidation, which has seen a number of well known Scottish names swallowed by larger English rivals in recent years, is also showing no signs of slowing down.

Indeed 86 per cent of those responding said it was likely or highly likely there would be increased merger activity among mid-tier Scottish firms while 79 per cent believed deals were going to be struck with UK firms.

Along with that more than two-thirds, 69 per cent, admitted they had been involved in merger talks at some stage.

The number one barrier to completing a deal was not financial but finding a firm with a suitable culture.

The fashion for partners moving more freely from firm to firm also shows no sign of abating.

All those who responded said they had "managed" partners out of their business in the past year.

There were 22 per cent who demoted partners from equity to non-equity while 11 per cent had also significantly reduced an equity partner's interest in a firm.

Charles Barnett, professional services partner with BDO, comments: "When the economy started to decline in 2008 law firms were, on the whole, quite slow to respond to the increased financial challenges. Many firms, which had been around for a very long time, perhaps took the view that they had survived previous downturns and this would be no different.

"Others got caught with substantial financial liabilities which became unsustainable when fee income reduced.

"Our current survey reveals a much more savvy, and financially aware, group of firms who understand that managing the accounts is as important as managing clients and the firm. These are positive developments which will position many more firms to take advantage of the improving economy."

There were brighter notes with one quarter of respondents saying they had grown staff numbers by more than five per cent with a further 69 per cent confirming employee growth of up to five per cent.

Just six per cent indicated there had been a reduction in headcount across the year.

Encouragingly 88 per cent expected to increase recruiting across the next 12 months.

Real estate and construction was the industry sector where law firms expect most growth to come from while private client work is predicted to be the best performing practice area.

Mr Barnett added: "This survey is considerably more optimistic and positive than our previous one in 2011. In the intervening time many well established firms have gone but there is clear evidence that Scotland's law firms have absorbed the message of the last few years and have taken affirmative action to ensure their firm will be around for many years to come."

"I think that Scotland's legal market, which will continue to attract merger and acquisition interest from elsewhere in the UK and abroad, is in a healthier, more vibrant state than it has been for many years. This can only be good news for the sector as the Scottish economy improves and firms are able to take advantage of this growth."

The survey was answered in January this year with the 16 respondents all among the top 30 law firms in Scotland.