The vast majority of partners believe it is likely that more large law firms will collapse over the next two years, according to new Legal Week research.

In the wake of Cobbetts' recent rescue takeover by DWF and Dewey & LeBoeuf's implosion last year, the latest Big Question survey found 95% of respondents acknowledging the possibility that more large corporate law firms would fail in the near term, including 32% who believed another collapse in the next two years was 'likely' and a further 42% describing such an event as 'very likely'.

Cobbetts last week sealed a pre-pack deal with DWF after a tough post-crunch period for the firm, while Dewey sunk into bankruptcy last year after a stream of partner exits and financial mismangement. Of the 100-plus respondents to the survey, only 5% thought it was 'unlikely' or 'very unlikely' that more such failures would occur over the next two years.

Slaughter and May executive partner Graham White said: "Dewey and Cobbetts were very different cases and failed for unrelated reasons, but it is clear that for many firms it is a very difficult backdrop at the moment. Firms without a clear market position, differentiation or sound financial management might find it harder to cope.

"At the moment, the market is much tighter, with increased pricing pressures, profitability squeezed and work reduced against a background of fixed overheads that represent a large proportion of outgoings and can be difficult to cut back."

While 39% of partners were confident their firms would not encounter similar difficulties, the remaining 61% expressed concerns that their firm could collapse or face severe financial problems, including 13% who said they worried about such an outcome 'quite a bit' or 'a lot'. 

Twenty-two percent did not worry 'very much' about such difficulties. However, 88% of respondents were confident their firm had effective policies in place to withstand financial shocks or the loss of a high-billing team. 

Excessive debt was seen by 52% of partners as the most likely contributing factor to law firm failures, while 51% cited poor financial management and cost controls, with 42% blaming bad leadership. One third thought excessive property liabilities also made firms vulnerable to serious difficulties.

Simmons & Simmons head of corporate and commercial Mark Curtis commented: "High levels of debt and poor financial management are the most obvious causes of financial problems. Mismanagement can also critically undermine partner confidence in the partnership across all areas, such as with Dewey, where partners appeared to lose confidence in the management."

The survey responses also revealed a belief that the scale of a law firm can help weather financial shocks, with 76% of the opinion that larger firms could offer a degree of protection.

borthwick-trevor-webAllen & Overy banking partner Trevor Borthwick (pictured) said: "Poor financial management covers most of the factors that leave law firms vulnerable. The big issue ultimately comes down to firms paying out more than what's coming in, and, while larger firms by revenue should offer a degree of protection, the harder the fall would be if they were financially mismanaged." 

Curtis added: "Without a clear strategy or hedging against weakness in the UK market, more firms may struggle. Firms with an international outlook, on the other hand, may be less susceptible to changes in the local market."

The research also revealed that just 13% of firms have looked closely at case studies or examples of collapsed professional services firms to learn from their mistakes. Forty-two percent of respondents said their firms had not considered such issues.

Clifford Chance restructuring partner Adrian Cohen said: "Such a pessimistic view from the majority of the partners surveyed suggests that the environment remains challenging in some parts of the middle market where most law firm failure has occurred."

One Manchester partner at a top 20 law firm commented: "A number of firms continue to struggle, especially here in Manchester where we have too many law firms competing for too little business.  There are rumours circulating about who will be next, which begs the question how long will banks continue to sit there and watch debt levels across LLPs creep up while partners continue to draw at the levels they are?"

Partners on law firm collapses

74% believe it is likely more large law firms will fail over the next two years

42% have never reviewed case studies of how professional services firms have collapsed 

39% believe law firm bankruptcies have a negative impact on the wider image of the legal profession