Anthony Hilton: Law firms living on the edge of oblivion

Figures published this week said the number of bankruptcies is well down on what you would expect at this stage in the business cycle. Ironic then that so many of them are solicitors.

One of the worst-kept secrets in the City is that much of the legal profession is in dire financial straits. The biggest are suffering from the absence of mega deals; mid-market firms are squeezed by the costs of trying to punch above their weight and clients who argue about the fees or demand a fixed price in advance for the work they commission; small firms from new entrants undercutting them in traditional money earners such as house-purchase conveyancing, and the smallest because they never have cared much for the basic disciplines you need to run a small business in tough times and it has caught up with them.

How bad is it? Bad enough for some old hands in the industry to predict the number of law firms will halve in the next five to 10 years.

The problem at the bottom is particularly acute. Lawyers see themselves as members of an august profession. Many don't understand the technologies which would help them cut costs and have never learned how to manage their cash flow. They bill late and get paid even later. They sometimes don't get paid at all.

Waiting months for their cash mattered less in the old days because overdrafts were easy to come by and the local bank manager would tide them over so they could continue to draw income and live in the style to which they were accustomed. But banks are more and more unwilling to carry on in this fashion. Many are alarmed at the way outstandings have ballooned in the past few years and want their money back. This is crunch time because a lot of the solicitors can't pay, and see little prospect of their business recovering enough to satisfy their bank anytime soon.