While this is undoubtedly true for some firms, the challenges in the UK legal market highlighted in our previous surveys have taken a huge toll on others, so much so that their medium term survival is by no means assured. Pricing pressures, effective utilisation of fee earners and cost reduction have all been major challenges since 2008, driven by shrinking markets, new entrants and consequent oversupply for legal services.
This year’s survey clearly shows the impact fundamental change has had on the size, shape and segmentation of law firms, and I wanted to start with the effect on UK profit per equity partner or PEP, which is still the most keenly watched measure in the sector. Two interesting patterns emerge from our 2013 survey. Firstly just how far behind in real terms PEP is when compared to 2008, 29% for the top 10, and a staggering 37% for the top 11-25. Secondly the difference in average PEP of the top 10 compared to the top 11-25, which now stands at 125%, which is the largest difference our survey has ever recorded. So it’s clear that the UK legal sector hasn’t recovered since the onset of financial crisis in 2008/9, and despite major consolidation in the mid-tier PEP performance continues to deteriorate in that segment.
We also see marked segmentation in the sector in profitability terms. Top 10 firms have maintained profitability in the face of the economic challenges over the last five years, and that’s despite a 4-6% fall in average chargeable hours since 2008. Outside the top 10 maintaining profitability is proved to be an impossible challenge, and there’s now practically no difference in average profit margins outside the top 10. Chargeable hours in the mid-tier have seen an even more pronounced fall, and that’s up to 8% since 2008 at some grades.
So what do we expect to see in the coming months and years? Well our July 2013 quarterly survey does show some signs of a pickup in activity in the UK. However we don’t expect this to be sufficient to holt the decline in performance for some firms in the mid-tier. Over a quarter of firms outside the top 10 reported profit margins of less than 20%, and without significant restructuring further cost reduction and business process improvement, the medium term future of these firms cannot be assured.