We will continue to see large scale activity within the sector with high volumes of mergers and acquisitions over 2019 as firms look to reposition themselves across locations and sectors. In a market which is historically resistant to competition, there are many indicators of increasing competitive pressures. Thus, we are now operating in an extremely competitive landscape which will drive mergers as firm’s look to protect themselves from declining market share and rising costs. Whilst successful mergers should facilitate cost savings by streamlining support and back-office functions, in practice such efficiencies are difficult to achieve. This competitive landscape will also drive the inevitable failures as firms struggle to compete.
As well as the widely reported difficulties within the Personal Injury market which will lead to declining volumes and profitability over the next couple of years, the SME market is also facing challenges. The top four accountancy firms continue to invest within the legal sector and develop their own offerings which will erode existing firms’ market share. These new entrants should not be dismissed. They have significant back-office resources, have proven abilities in processing and a familiarity with technology which will enable them to develop, embrace and utilise AI effectively. It should also not be forgotten that they already have existing relationships with some of the largest clients within the UK and are well positioned to use these relationships for the cross-selling of legal services.
The rise of the alternative legal sector also continues to build momentum where legal services typically provided by regulated solicitors are now being provided by charities, online portals or other non-regulated advisors. With little or no regulatory cost placed on many of these businesses, they are in a strong position to competitively price their services and operate efficient business models.
Lending within the sector has changed over the last few years and this will continue to do so throughout 2019. There is less appetite from the main clearing banks to provide working capital facilities and this has given rise to new specialist lenders within the sector which look to advance against disbursements and bills of costs as opposed to a typical overdraft and term loan. The increased uptake of Alternative Business Structures (“ABS”) has also facilitated Private Equity firms and other private investors to invest within the sector and this trend will only continue within 2019. Typically, such investors provide a greater emphasis on cost management and are more likely to embrace and facilitate change than those of typical ownership structures.
With rising business rates, onerous long terms leases, higher costs of capital and increased competition, the result is a challenging environment for the sector over the next 12 months.
