THE BLOG

Lawyers and Accountants - Adapt or Keep Dying

27/08/2013 16:17 BST | Updated 23/10/2013 10:12 BST

The collapse into administration of major accountancy firm RSM Tenon is a sobering moment for well-upholstered professional service partnerships everywhere.

On the face of it the debacle arose from particular circumstances, not least the exquisite embarrassment of a top seven national auditor by revenue failing to audit itself properly whilst embarking on the sort of giddy, risky buying splurge its clients generally avoid.

This may all sound familiar. In 2010 the well-established and ambitious law firm Halliwells collapsed, partly because senior partners thought it acceptable to pocket secretly a windfall and not share it with staff. The firm unravelled itself to death, eventually also collapsing through poor management into administration. This was a partnership once powering towards being a top 25 UK law firm.

Recession and deregulation have left law and accounting, pillars of the professional services sector, oddly vulnerable. The problems at Tenon are just an extreme version of the challenges facing mid-tier advisers everywhere. Another significant regional law firm, Challinors, went into administration this month.

Many are bedevilled by traditional partnership structures that reward patience, time-served and no boat rocking - a sort of professional Buggin's turn. Before deregulation, accountants and lawyers were not particularly encouraged to think like their corporate clients let alone act like them. Now they are and do, sometimes with disastrous results. I fear there will be more failures.

Recklessness through inexperience is one problem, but inertia is the other. There is often little incentive for the most powerful partners, those holding an equity stake in firms, to go out and actively win new business. Instead, they take over a book of clients and expect to coast into a comfortable retirement. Because they usually have the power to appoint management teams nobody challenges this ethos of inactivity.

This all matters because there is less transactional and compliance work to go around, and a lot of what there is gets sent to cheaper, out-of-town firms these days. There are also online DIY offerings undermining jobs in law and accountancy firms. Slowly but surely, brick by brick, work is being taken away by nimbler, cheaper and more ambitious newcomers.

Social media has not helped either, allowing smaller professional service firms to publicise their offerings, once something only larger ones with marketing ammunition could do.

Banks are more reluctant to lend to professional services firms, just as deregulation has opened up all sorts of cross-disciplinary merger opportunities, a combination tempting partners to embark where bankers fear to tread into a giddy fiesta of mergers and acquisitions.

In the wider world the client base is changing too, particularly as small and medium-sized enterprises, those fabled 'SMEs' that are our bread and butter, increasingly merge, often with international partners, and drain work abroad as a result.

Professional services firms face a lot more regulatory heat than in the past, too, with Financial Conduct Authority investigations and professional disciplinary boards a fact of life.

It is hardly surprising against this gloomy backdrop that many mid-tier firms are reporting substantially lower profits. Needless to say, partner expectations about income remain as high as they ever were.

The result is that partners in their fifties and sixties are hanging around, effectively bed-blocking others from coming through, because pension pots have shrunk to rule out any early retirement.

This is significant because traditional professional firms tend to share profits based on longevity of partnership and size of portfolio, rather than business development skills. This effectively rewards partners who may no longer be contributing to the growth of the firm.

If mid-tier firms are going to survive this has to stop. Partnerships need to recognise that the key is the quality and tenacity of its business winners. This may mean restructuring so that the doers are directors, whilst equity is held by the business winners. In other words: It is time to drop the link between remuneration and length of service because it's killing the golden professional services goose.

Now more than ever law and accountancy firms need clear strategy and leadership, sector and service line focus and superb client relations. Firms cracking these will not only survive but thrive.