PwC survey suggests "especially tough" year as a result of fall in transaction activity
Scotland's top law firms report 2012 was another year of flat financial performance, a new survey suggests.
Profit per equity partner in Scotland fell by 5.1 per cent last year, accountancy firm PwC's annual survey of the UK's Top 100 law firms found.
Michael McCusker, partner and legal services specialist at PwC in Scotland, said 2012 had been an “eventful year” for Scottish legal firms, “with the gap between best and worst performing firms beginning to widen further”.
PwC's survey suggests an overall flat financial performance for Scottish firms in 2012, which was “mirrored across the UK”.
PwC said Scottish firms found the market “especially tough” last year, “given the dearth of transaction activity compared to previous years”.
However, PwC said Scottish firms were reporting “some positive trends,” with net profit margins remaining “relatively consistent” at 26.6 per cent, above the average of 23.75 per cent for Top 51 – 100 firms.
The survey also found fees per fee earner in Scotland rose 2.1 per cent last year to £149,000 and profits per fee earner increased by 2.3 per cent to £45,000.
However, for Scottish-based partners, profit per full equity partner fell by 5.1 per cent last year to £263,000.
The survey also found although 82 per cent of firms surveyed reported an increase in income last year, much of that growth was a result of mergers and acquisitions rather than organic growth.
PwC said “a number of mergers and lateral hires” affected absolute growth numbers.
In 2012, the average fee income of the firms surveyed fell by 21.7 per cent on the previous year, from £35.1 million to £27.5 million, compared to an average increase of 3.6 per cent for the top 51-100 banding in which many Scots firms operate.
UK-wide, average fees per partner have dropped 22 per cent in the past four years, the survey suggests, to £2.5 million
For the Top 100 in real terms average UK fees per partner have fallen 22 per cent in four years to £2.5 million.
PwC said the average profit per equity partner (PEP) has also dropped 24 per cent in the past four years to £951,000, despite a six per cent drop in equity numbers.
McCusker said: “Against a difficult backdrop, 2012 could be characterised as another eventful year for the legal sector, with the gap between best and worst performing firms beginning to widen further.
“In Scotland, firms have been responding to the market challenges in a number of ways, for example reducing costs, improving partner and business performance and simplifying service delivery to clients.
“However, more clearly needs to be done to tackle ongoing pricing pressures along with the material reduction in the level of profit per equity partner recorded in 2012 (-5.1 per cent).
“Over the last 12 months, the legal M&A market has been particularly active in Scotland, with English firms Pinsent Masons, Shoosmiths and DWF merging with McGrigors and Archibald Campbell and Harley, and Biggart Baillie respectively.
“With pricing pressures likely to remain for the foreseeable future, we may see more firms looking to achieve real reductions in the cost of service delivery through mergers or perhaps even identifying new areas of expertise to exploit.
“Indeed, those firms that can deliver a quality client service in a niche area may perform better over the longer term than those which seek to provide a full service offering with no differentiation.”
PwC said its survey also found alternative business structure (ABS) legislation is now beginning to impact some segments of the market, with new entrants taking a bigger market share.
McCusker said: “In Scotland, it is anticipated that ABS will be in place by the spring enabling non-regulated professionals to take up to a 49 per cent share in a Licenced Legal Services Provider (LPs), a contrast to England where a 100 per cent stake can be held.
“With the enactment of the final element of the Legal Services Act and the first ABS licences awarded towards the end of 2012, we expect new entrants with strong financial backing to make their presence felt in the high volume end of the market.
“It will be interesting to see the impact of ABS in Scotland and whether firms pursue this model as a means of securing external capital for growth and expansion.”