Fee income among the UK’s top 25 law firms have continued to show strong growth, while profits per partner have also increased, albeit at a lower rate than a year ago.
The 16th annual law firms’ survey from PricewaterhouseCoopers (PwC) found that as well as benefiting from a buoyant UK economy, firms have also enjoyed a strong performance from their corporate, banking and property practice areas.
The 2007 survey also points to the particularly strong growth of the top ten firms, with two thirds reporting fee income up by more than 10 per cent. Among the top 25, 65 per cent recorded growth in profits per partner of 10 per cent or more, down from the 75 per cent which managed this last year. This indicates that firms have been finding it more challenging to raise profits than to increase top line performance.
The findings show that the top ten firms are beginning to break away in terms of profitability, achieving average profits per partner of £866,000, compared to £781,000 in 2006. For the remainder of the top 25, average profits per partner were £497,000, compared to £478,000 in 2006. The trend is even more marked for the larger firms in the top ten.
Alistair Rose, leader of PwC’s professional partnership advisory group, said, “Managing equity partner numbers continues to be a key driver of the level of profit per partner, with only a third of the top ten increasing their number during the year, while 58 per cent of the 11-25 group did so. This tight rein over equity partner numbers appears to be driving an even greater differential in levels of fee income and profits between the larger firms.”
Despite the growth in fees and profits per partner, firms’ net profit margins have remained steady, with the continued rise in staff costs and high levels of associates’ turnover likely to be significant contributory factors.
The largest firms nevertheless achieved the best margins. Some 78 per cent of the top ten recorded net profit margins of more than 30 per cent, while only just over half of the 11-25 firms managed to reach this level.
International expansion has continued this year, particularly in China and France, with the majority of top 25 firms now having a presence in those countries. Overseas fee income growth has continued to be strong, with two thirds of the top 25 reporting increases of over 15 per cent and as many as 37 per cent recording more than 25 per cent.
Firms continue to record a larger proportion of fee income from overseas than they do profits, although the number of firms generating over 30 per cent of fees and profits overseas has increased for both measures this year.
The rapid international expansion seen over the past three years may be starting to slow as firms look to consolidate their positions. The number of firms seeking expansion in almost all regions, with the exception of China and the Gulf States, is significantly lower than in previous years.
This year’s survey also addresses for the first time the issue of corporate responsibility (CR). Some 86 per cent of the top 25 firms have a formal CR programme, with the most common features being environmental issues, community/charity involvement and employee welfare.
Firms also reported significant client pressure with regard to CR, although the survey indicates there is still some way to go to increase partner engagement and to fully embed CR practices into law firm management.
Rose said that firms are again budgeting for a strong performance in 2007-2008 adding that it will be interesting to see if profit levels can be maintained. PwC believes that this will no doubt be a strategic focus for many, all the more so given the uncertain international economic and banking environment we are experiencing at the moment.
“The top ten firms are beginning to establish clear water between themselves and other firms, both in financial performance and utilisation. Despite this strong performance, however, they face the most pressure in terms of retention as the war for talent continues. It remains to be seen if this performance from the top ten can be sustained into 2008, particularly if weakening economic and market conditions impact firms,” Rose added.