Legal firms' 'year of turmoil' hits profits

A SURVEY of the top 100 UK law firms has laid bare a "year of turmoil" as reductions in fee income, fees per partner and profits per partner led to an overall decline in profits among firms of 30 per cent.

Mike McCusker, a Glasgow-based partner with report authors PricewaterhouseCoopers, said the last year has "seen the greatest turmoil in the law firm sector" since its survey began in 1991.

"It was quite clear at the time of our last survey that law firms would not be immune from economic crisis," said McCusker. "As it turns out, the impact across the sector has been even greater than we anticipated."

Scottish firms suffered an even greater fall in profits than their counterparts south of the Border. PWC said this was a result of a "conscious decision" among Scots not to cut operating and staff costs as sharply as English firms had.

Although a net profit margin in Scotland of 31 per cent was consistent with the UK average for similar-sized firms, property costs were on average higher in Scotland – 10.5 per cent compared to 9 per cent in England.

PWC said a number of Scottish firms had spent the past 12 months either considering or embarking on redundancy programmes, with support staff seeing the greatest number of job losses. With confidence remaining weak that revenues will grow this year, it is expected headcount reductions will continue in 2010. No Scottish firms surveyed said they were confident about prospects for revenue growth this year.

Despite the gloom, some of the larger Scottish firms said they had seen an increase in average fees per partner – up to an average of 940,000 from 890,000 in 2008. As many as 60 per cent of Scottish firms believe that this will continue in 2010 compared to 55 per cent of firms UK wide.

More Scottish practices said they were counting on corporate merger and acquisition activity as a means to boost income this year. Only 12 per cent of firms polled cited M&A as a growth opportunity, while 30 per cent in Scotland did. Scottish firms were also better than their UK counterparts at collecting on bills. The survey said Scottish firms' focus on recovering payments outperformed the UK average, with debtor days averaging 75 in Scotland compared to 83 across the UK.

The survey also showed that Scottish firms spent "significantly" less on secretarial support, IT and marketing than their UK counterparts, but invested 30 per cent more on HR and training.

McCusker warned that operating models for UK law firms were under "severe stress" and the prospect of mergers or business failures could not be discounted.

"Survival in the current form for some firms may prove a challenge if market conditions do not rapidly improve," he said.

"As we look towards the future, the survey clearly shows that structural change is already happening in the Scottish and UK legal profession."

He added: "The catalyst of the recession has led firms to focus on efficiency, cost reductions by structural change and headcount cuts in both fee earner and support staff headcount. However, the full impact in terms of profitability following any redundancy programmes may not be seen until 2010-11."