29 Oct 2012 11:03
PriceWaterhouseCoopers – LawFuel.com – UK Law Firm Newswire – The UK legal sector has had another tough year with challenging market conditions, according to the latest annual survey of the Top 100 law firms from PwC. Uncertainties in the UK and global economy have lead to a fairly flat performance for the majority of law firms. The survey also finds that the alternative business structure (ABS) legislation is beginning to have some impact on some segments of the market, with new entrants taking a bigger market share.
Although 82% of firms surveyed actually increased UK fee income this year, much of the growth was due to acquisitions rather than being organic, with a number of mergers and lateral hires affecting absolute growth numbers. Once inflation is taken into account, performance was broadly flat for the majority of firms.
The Top 10 firms accounted for around 44% of total fee income across the Top 100, reinforcing their dominance of the UK legal market. These larger firms continue to record significantly better UK results than the competition across all financial measures. At net profit margin level, there is now an 11% gap on average between the Top 10 and the next 15 firms. Outside the Top 10, an average margin difference of only 2.4% separates the rest of the Top 100 firms.
David Snell, partner and leader of the professional partnerships advisory group, PwC said:
“Against a difficult backdrop, 2012 could be characterised as a solid year for the legal sector, with the gap between best and worst performing firms beginning to widen further. The big differentiator for the largest firms remains their higher chargeable hours, premium pricing and tightly managed fee earner headcount. In the mid-tier, clear strategic focus is required and firms that deliver a quality client service in a niche area often do better than those which seek to provide a full service offering with no differentiation.
“This year also saw the enactment of the final element of the Legal Services Act, and with the first ABS licences awarded recently, we expect new entrants with strong financial backing, to make their presence felt in the high volume end of the market. This year’s survey already shows the impact that new entrants are beginning to make.”
The PwC survey notes that firms remain a long way short of the levels of performance they saw at the peak of the market back in 2008. For the Top 100 in real terms average UK fees per partner have fallen 22% in four years to £2.5 million. Average PEP is also down 24% to £951,000, despite a 6% drop in equity numbers over the four years. Firms in the 11-25 bracket have suffered the greatest proportional fall in PEP – an average of 31% – to £481,000 and this is further flattered by an average decrease of 20% in equity partner headcount over the same four year period.
Cost reduction remains high on the agenda for law firms with 53% of those polled having completed cost reduction programmes over the last 24 months. However, the majority reported savings of 5% or less and none of the Top 25 reported savings above 10%, a surprising result which suggests firms should be taking a more transformational approach to this.
International expansion continues to be a strategic priority for the larger firms, with half of the Top 25 now sourcing more than 40% of fee income from international operations. Half of the Top 10 firms said they expect to merge with or acquire an international firm in the next three years, up from just 17% in 2011.
David Snell, partner and leader of the professional partnerships advisory group, PwC commented:
“Continued focus on cost reduction and innovative delivery is required across all firms to maintain profitability in a highly competitive UK market. At the same time international; expansion into the emerging markets offers an opportunity for revenue growth for firms that have the scale and appetite to compete on a global playing field.
“Looking ahead, firms are less confident than they were a year ago about the prospects for growth in the legal sector in the next three years, although about half of the Top 50 firms believe they will outperform the market for the period to 2015. There is a general view that the next 12 months will continue to be challenging, with some firms in the 11-25 rankings, in particular, acknowledging the challenges of an increasingly mature market and recognising further consolidation in the mid-tier is likely.”
Other key findings from the survey include:
· 58% of all firms view mergers and acquisitions as a major opportunity for growth, with the larger firms focused on international mergers, the mid tier on joining with other UK firms.
· Headcount has remained stable in the Top 10, while firms outside this ranking have seen significant average reductions in both equity partners (down 12% for the 11-25; 6% for the 26-50) and in overall fee earner numbers (fee earners including partners down 8.5% for the 11-25 and 18% for the 26-50).
· Business process outsourcing is an area of increasing maturity. Most firms have taken steps to evaluate outsourcing in recent years, some clearly embracing it, but a few remain to be convinced of the fit with their culture and strategy. The greatest uptake has been in outsourcing travel, facilities management, IT infrastructure, payroll and training.
· Legal process outsourcing/offshoring is expected to become an increasingly important area for the sector, as pricing pressures and the threat of new entrants combine to force firms to reappraise how they deliver legal services, while maintaining quality as a ‘non-negotiable’.
· Working capital management presents an increasing challenge for many. Lock-up has deteriorated across all bandings, largely driven by lengthening work in progress days. The traditionally best performers, the 11-25 ranked firms have seen deterioration to 115 days from 104, with the Top 10 averaging 124 days and the 26-50 131 days.