PwC Survey Finds Top UK Firm Profits Down By 30%

By Liz McKenzie

Law360, New York (November 12, 2009) -- Profits at the top 100 law firms in the U.K. fell by 30 percent since last year, and many firms aren't holding their breath for revenue growth over the next 12 months, according to a recent survey.

The PricewaterhouseCoopers LLP study, released Wednesday by the firm's U.K. arm, concluded that law firms in the U.K., battered by decreased profits and other effects of the recession, remain skeptical about the prospects for revenue growth.

The U.K.’s top 10 firms fared better than those in lower tiers, seeing a decline of roughly 21 percent in profits per partner last year compared to the overall average decline in profits of 30 percent at the top 100 firms.

The average profit per partner at a top 10 firm, PwC said, was £872,000 ($1.4 million), nearly double that of the next tier, 11-25, at £444,000 ($736,000).

PwC argued that firms in the 11-25 tier performed “relatively badly” during the recession for several reasons. It is those firms that saw the greatest average fall in U.K. income and that have been operating in the most competitive and deflated areas of the markets — such as transactions and deals. They also have also performed fewer partner layoffs than other firms, the survey noted.

“This year has seen the greatest turmoil in the law firm sector since our survey began in 1991,” PwC partner Alistair Rose said. “It was quite clear when our last survey was published that law firms would be far from immune from the economic crisis.”

“As it turns out,” he continued, “The impact has been even greater than we anticipated across the sector. A relatively small number of firms predicted the likely extent and severity of the recession and started to cut headcount and take out cost early in the second half of financial year 2009.”

PwC also said business confidence overall is still weak and none of the top 10 firms responded that they were “very confident” about prospects for revenue growth in the next year.

PwC estimated that chargeable hours had fallen by up to 20 percent and warned that some firms are likely to continue with staff reductions in 2010. In some cases, firms’ chargeable hours are at levels below those of 2006, PwC said.

The good news is that overseas revenues, very important for larger firms, substantially assisted in this year’s currency flow. PwC said three-quarters of the top 10 firms take away more than 40 percent of their total fees from international operations.

Still, those profits are also down from the past, particularly in the Middle East, Central and Eastern Europe and the Far East, the survey said.

The data also indicated a growing trend in outsourcing business support functions such as accounting, HR and procurement as well as traditional areas such as payroll, IT and facilities management. One positive of the recession, however, is the shift back toward client relationships, though firms must work hard to differentiate themselves from the competition, PwC noted.

“Fierce competition has made firms think hard about how to become distinctive in the eye of the client,” Rose said. “Client relationship and engagement management, sustainability and innovative delivery models are all moving fast up the agenda as a result. The recession has put some operating models under severe stress and survival in the current form for some firms may prove a challenge if market conditions do not rapidly improve.”