PARTNERSHIP: An Introduction
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by Fox Williams LLP
The professional services sector has remained resilient and appears to be emerging on a growth trajectory, notwithstanding continued uncertainty as to the global outlook. In the legal sector, some firms are seeing UK revenues of around 25% greater than at the same time at the height of the 2020 lockdown. The top 50 UK firms achieved partner profits growth at an average of 20%, with some firms at double the average figure. Revenues also grew in the accountancy sector but some profits suffered. These results emerge against a background which has included deferred partner profit payouts; furlough for staff using government funding; reduced hours and reduced pay for staff; and redundancy exercises. This excited some comment in certain quarters about the ethics of highly paid partners being subsidised by government funding. Many firms have repaid the government funding they received and have paid “thank you” bonuses to staff compensating them for reduced pay during the lockdown. Business confidence appears to have returned to pre-pandemic levels. The value of funds available for litigation together with the value of cases already funded by the major UK funders has passed £2 billion. An increase in disputes work is expected as a result of the pandemic restrictions on pursuing defaulting creditors being lifted.
Mergers: law firms
With many firms focused on the uncertainty of the pandemic it is not surprising that there were fewer substantial mergers of professional partnerships. The pandemic may have extended merger timetables but firms remained active in pursuing growth opportunities. Dentons continued to acquire a number of overseas firms, including in South America and Africa. Eversheds Sutherland announced a combination with long-standing relationship firm FCB with practices in Portugal and Africa. The largest domestic merger in terms of lawyer numbers was between regional firms Harrison Clark Rickerbys and Hewitsons. One of the Big Four, Deloitte acquired law firm Kemp Little, doubling its UK lawyer headcount. US law firm Armstrong Teesdale launched in London with the acquisition of Kerman & Co. Listed law firms continued their expansion with RBG Holdings, owner of law firm Rosenblatt, acquiring corporate law boutique Memery Crystal for £30 million and Knights picking up Sheffield-based Keebles for £11 million.
Mergers: accountancy firms
The consolidator firms, notably Azets, increased their coverage. There were some major deals in restructuring services. Begbies Traynor will pay up to £21 million for CVR in its largest ever insolvency services acquisition. An unusual feature of the merger market was the involvement of the Big Four. Both Deloitte and KPMG disposed of their UK restructuring divisions: Deloitte to Teneo, a portfolio company of CVC Capital Partners; and KPMG to Interpath Advisory, a portfolio company of HIG Capital. While this may have been in anticipation of the audit reforms faced by the Big Four, KPMG acknowledged that conflicts of interest were a particular problem in maintaining a restructuring offering. EY acquired the personal tax service business of Frank Hirth, substantially increasing its headcount for this offering.
In order to seek to prevent further accounting scandals along the lines of Carillion and Thomas Cook, the Big Four have accepted new rules from the current audit regulator, the Financial Reporting Council, to put in place ring-fencing between their audit and advisory teams. Principal concerns include that firms may not have backed audit teams making tough decisions if the result was to prejudice substantial non-audit services from the same audit client. New rules have been concerned with audit practices being remunerated by reference to audit fees and not from non-audit services. An operational split between the audit business and the rest of the business is to be in place by 2024. Annual audit fees for the UK FTSE 100 companies are at a record high. The requirement for a resilient ring-fenced audit practice is likely to result in increased audit fees.
Diversity and inclusion (and more particularly the failure of many firms to achieve the targets they set for themselves) is a continuing client-led issue. Sustainability is now also part of the client relationship. This is not the preserve of big firms which may be able to lobby and influence a change to a regulatory environment. Clients will look to firms to demonstrate which Environmental, Social and Governance (ESG) objective could be pursued, first at the firm and then to assist in the clients’ goals.
The major issue with which firms are struggling as a result of the pandemic is how to deal with organisation of their workforce post-lockdown. The financial performance of firms has demonstrated that a workforce operating from home is a viable financial model. Most firms have published a return to office roadmap, and there are a range of responses with different office attendance models and which may be compulsory, encouraged or suggested.
In the current market there is and has for some time been a great demand for professional staff. This will make firms consider whether their return to office policy is a block on recruitment. What is clear is that associates value the flexibility in not working in the office full-time. It seems clear that many firms will at least in the short term offer a hybrid working model.
The external issue on this question is the position of clients. In the same way that clients have required firms to address ESG issues, clients may (and as has been seen in one notable case) also require that their lawyers work as an in-person non-dispersed team. How firms respond to that situation is likely to be the acid test of whether there has been any fundamental change.