Most UK law firms have also seen a decline in fee income in the last year, driven by downward pressure on pricing, coupled with a general contraction in the international legal market, according to PwC’s 2010 law firms’ survey.
As in 2009, the top Scottish firms have been under continued pressure on profitability. Despite a continued reduction in both partner and fee earner numbers, average profit per equity partner (PEP) still fell in 53 per cent of all firms surveyed with 37 per cent of firms reporting a fall in PEP of over 10 per cent compared to 2009.
Mike McCusker, partner at PwC in Scotland, said: “While our survey shows the leading top 10 London-based firms are maintaining their breakaway position, it’s worth noting that their average profit per partner is still some 17 per cent lower than PEP in 2008.
“Scottish firms have fallen even further behind, reporting an average decline in profit per partner of 18 per cent to £239,000, despite three-quarters of firms either reducing or holding partner numbers consistent with last year.”
At the time of last year’s survey, a number of Scottish firms were either actively considering, or embarking on consultation or redundancy programmes at partner, fee earner and support staff levels.
This year’s survey indicates that in the end, support staff levels were reduced in greater proportion than fee earners, supported in part by greater use of outsourcing – over 50 per cent of firms in Scotland have reduced support staff numbers during the year.
The reduction in fee earner numbers has ensured that chargeable hours in Scotland have increased at all grades except salaried and fixed share equity partner, with some grades seeing increases of up to 20 per cent.
This suggests that while law firms are now much leaner and efficient than previously, there is still significant pricing and margin pressure in the Scottish legal marketplace with excess capacity still resulting in reduced profitability.
Mr McCusker said: “Despite the sustained market and financial pressure, 75 per cent of firms in Scotland thought it unlikely that they would merge in the next two to three years.
“In contrast, the survey revealed that 83 per cent of the top 11 – 25 firms (based mainly in London) predicted mergers as ‘fairly likely’ in the next two to three years – a sharp rise from previous years.”
The survey notes how partnership financing has received much focus during the year. Concerns last year over the availability and cost of bank funding to law firms appear to have been overstated as, in aggregate, the level of bank funding to law firms has increased.
Mr McCusker added: “Looking ahead, it appears the legal sector is approaching a tipping point. Many of the larger London-based firms have used the recent economic difficulties to focus on making their businesses more efficient and have taken innovative approaches to both back-office support and how they provide legal services.
“There is ongoing pressure on regional firms in the mid-tier, including those in Scotland, and it is inevitable that a number will need to consider their response to ongoing, difficult market conditions, client pricing pressures and new entrants to the market.”