Scotland’s largest law firms saw their revenues collapse by more than a fifth last year.
A survey of “top 100” legal firms by accountancy firm PwC found that average fee income in Scotland fell by 21.7 per cent, from £35.1 million to £27.5m.
Although PwC described 2012 as a tough year for legal businesses across the UK, firms south of the Border appeared to have fared much better than their Scottish counterparts. Among the second 50 tier, which includes the Scottish firms, revenues added 3.6 per cent to £35.9m on a UK-wide basis.
Michael McCusker, partner and legal services specialist at PwC in Scotland, said that the gap between best and worst performing firms is widening.
He added: “In Scotland, firms have been responding to the market challenges in a number of ways, for example reducing costs, improving partner and business performance and simplifying service delivery to clients.
“However, more clearly needs to be done to tackle ongoing pricing pressures along with the material reduction in the level of profit per equity partner recorded in 2012.”
Last year saw a number of mergers involving Scottish legal firms as many sought ways of maintaining profitability in the face of reduced demand for some services following the financial crisis and recession.
McCusker said the process would be likely to continue in 2013, while others would become more specialised in order to win clients.
“With pricing pressures likely to remain for the foreseeable future, we may see more firms looking to achieve real reductions in the cost of service delivery through mergers or perhaps even identifying new areas of expertise to exploit,” he said.
“Indeed, those firms that can deliver a quality client service in a niche area may perform better over the longer term than those which seek to provide a full service offering with no differentiation.”
More than half of UK firms surveyed said they viewed mergers and acquisitions as a major opportunity for growth, with bigger Scottish legal practices mostly likely to join with other UK firms rather than international organisations.
Profit margins in Scotland remained consistent last year at 26.6 per cent, above average for similar sized firms.
The data suggests that at least some of Scotland’s largest law firms suffered a considerable slump in revenues and income in the second half of last year, as reports for the financial year to April did not indicate the sector was experiencing such a squeeze.
PwC said that, while it was possible that there could be some distortion to the figures because of the mergers, the data was consistent with the information supplied by the mix of firms participating in its survey.
UK firms remain a long way short of the levels of performance they saw at the peak of the market back in 2008. The survey found that, in real terms, average UK fees per partner have fallen 22 per cent in four years.
And established legal firms will face challenges from new entrants to the market this year as new legislation makes it easier for businesses to enter the legal sector.