Despite the recent fall of Halliwells, partners remain confident that their firms have the necessary policies in place to maintain financial stability. Friederike Heine reports

Partners remain bullish that their firms can withstand financial shocks or the impact of mass partner departures despite the aftermath of Halliwells' recent collapse, according to new research.

The latest Big Question survey found that 77% of partners remain confident that their firm is able to avoid 'severe financial problems' or a full-scale collapse.

In contrast, only 17% of the 158 respondents to the survey admitted that they were 'a little' worried, while 6% of partners stated that they were 'very worried' about their firm.

Just under half of respondents (45%) felt achieving scale, such as having £100m-plus revenues, could ensure significant protection from financial shocks for law firms. A similar percentage (46%) of partners felt that scale could provide 'some' protection.

Hogan Lovells head of real estate disputes Nicholas Cheffings commented: "Because of the broad nature of their practices and client base, the larger firms tend to be less exposed to these kinds of problems than firms of a similar size and nature to Halliwells. They are less exposed to one singular problem and so, if something goes pear-shaped such as a major client relationship, it is unlikely to be fatal to the business as a whole."

The vast majority of partners (92%) felt confident that their firm has effective policies in place to ensure that the business can withstand financial shocks or the loss of a high-billing team, while only 8% did not.

The results show that partners at commercial law firms remain bullish despite the collapse of Halliwells – the largest law firm failure ever in the UK – and the bankruptcy of several large US law firms over the last two years.

Linklaters banking partner Gideon Moore commented: "The most important asset of any law firm is its people, and if a sufficient number of good people leave, it could, all too easily, lead to the demise of that law firm. By reference to past performance, law firms may appear to be relatively immune to collapse, but it is important that firms learn from this particular casualty."

Partners said that the principal factors that make commercial law firms vulnerable to severe financial problems or collapse are poor financial management and excessive debt, which were highlighted by 60% and 56% of respondents respectively.

Other issues highlighted by partners, who were asked to identify the two factors that make law firms the most vulnerable, were 'bad management or leadership' (33%), 'too many partners leaving' (18%) and 'excessive property liabilities' (18%).

Partners were relatively unconcerned about being dropped by clients, poor risk management or the fallout from a problematic merger.

"What really cripples law firms is high levels of debt," said Ashurst construction partner Ann Minogue. "The top 10 law firms in the City generally don't have extensive borrowing. The problem with some of the smaller firms is that they continue making distributions although they can no longer afford it."

Despite their confidence regarding their own firms, the majority of partners do consider a law firm collapse to be a major threat. Two out of three partners stated that their firm had reviewed case studies or examples of how professional services firms have collapsed from which to draw constructive lessons (63%).

More than one in three partners (36%) also think there is a considerable chance that a UK top 50 law firm will collapse over the next five years due to a major negligence claim. Twenty-eight percent of partners think there is a little risk of this happing (28%), while only 1% think that there is no chance.

Cheffings added: "I am certain that the collapse of Halliwells will act as a wake-up call for many of the smaller UK firms in the same way that the shock of Arthur Andersen's collapse a few years ago sounded alarm bells for the large international firms – it's the 'if it can happen to them…' syndrome."

Partners on law firm collapses

• 92% believe their firm has effective policies to ensure it can withstand financial shocks or team losses
• 91% believe that scale increases financial stability
• 77% are confident their firm can avoid major financial problems or a collapse
• 36% see a substantive risk of a top 50 law firm collapsing over the next five years due to a negligence claim