The biggest 100 law firms in the UK by revenue face deepening gloom about their commercial prospects as they budget for lower growth next year.
The firms are on average forecasting about 5 per cent growth in fee income for the 2012-13 financial year, compared with expected annual income of about 7 per cent in this financial year, according to research.
Big law firms became accustomed to double-digit revenue growth before the financial crisis, after which lucrative mergers and acquisitions work dried up. To maintain net growth, many firms’ partnership models need to boost their profits at least 5 per cent each year.
Firms are also facing a changing legal market where new entrants are shaking up traditional partnership models and ways of delivering legal advice in the wake of the Legal Services Act, which liberalised Britain’s £23bn legal market and allows external investment in firms for the first time, as well as permitting non-law firms to sell legal advice.
“Many firms are facing significant pressure both in their external markets and internally to their partnership models,” said Jeremy Black, a partner at Deloitte, which undertook the research as part of its quarterly survey of the UK legal market. “The modest level of growth being budgeted for the coming year will only heighten this pressure.”
In the quarter ending in January, the leading 100 firms increased their fee income 7.2 per cent compared with the same period last year, the study showed. This is slightly lower than the previous quarter, when the firms posted an average 9.8 per cent increase in revenue.
Within the group, however, there was wide disparity. A third of the cohort either reported a fee income increase above 18.5 per cent, or a decline of more than 4.1 per cent.
Performance is “increasingly dependent on firms’ practice areas and geographic footprints. Litigation continues to perform well, whilst corporate revenues remain lacklustre,” said Mr Black. “Those with a presence overseas, particularly in Asia, are able to bolster their performance in light of a more stagnant domestic market.”
This is a repetition of a refrain heard last year, when all four “magic circle” firms, the biggest London-headquartered firms, reported strong growth from their Asian offices, particularly those in China; a bright spot among generally muted financial results elsewhere.
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