Analysing the Risk of Insolvency for Law Firms

Analysing the Risk of Insolvency for Law Firms

January 31, 2017

The Lexis PSL Practice Management series has published an interview with our Business Risk Adviser, Nick Hood which looks at the deeply worrying state of law firm finances in the UK following research carried out by Opus  Restructuring in January 2017.

Lexis PSL: What were the most surprising findings in your research?

NH: The norm for the whole of the UK economy is that around 25% of companies are financially vulnerable at any time. The figures for laws firms (34%) were truly shocking, suggesting that there is a potentially systemic issue with legal profession’s business model and its funding. 

Lexis PSL: What do you think are the main causes for this? 

NH: There is a pernicious cocktail of negative factors affecting the finances of law firms. The Jackson reforms in April 2013 were aimed at curbing what were perceived to be excessive litigation costs and caused considerable disturbance to many practices. Although this brouhaha has settled down to some degree, the issue of costs has not gone away. This may have contributed to the current move away from the traditional bedrock of many firms, the concept of setting fees based on billable hours, to a fixed fee and/or value basis instead, which is undermining the business model of many civil-based firms. Personal injury firms (both large and small) have been the most badly hit. Those engaged in work in the criminal sector have seen legal aid decimated. Courts are now overrun by litigants in person and their Mckenzie Friends, rather than barristers and their instructing solicitors. Generally, as revenue falls, staff and property costs have become unsustainable and profits have dwindled to the point where many practices are no longer viable.