Consolidation in law sector sees Northern firms return to growth

Research from PwC shows more law firms have increased their fee income than at any time since 2008

More law firms across the North have increased their fee income than at any time since the start of the economic crisis.

Research from PwC shows significant consolidation and merger activity in the sector has driven the increase in fee income at 53% of firms surveyed.

Nearly a third of law firms in the North believe they will merge with another firm in the next three years.

The top ten firms surveyed have recorded their highest ever average net profit margin at 40%, and the Top 11-25 firms have started to reverse the previous five year trend of margin deterioration, posting an increase from 26.0% to 28.2%.

Bill MacLeod, PwC’s senior partner in Newcastle, said: “With clear evidence of improving economic conditions, our 2014 Law Firms Survey confirms that a degree of stability and confidence is returning to the legal sector across the north. Corporate activity has re-ignited, with a corresponding uplift in transactional work, and firms are busy again.

“Notwithstanding this atmosphere of cautious optimism, the environment facing UK law firms remains fluid and challenging. Pricing pressures, mergers and acquisitions, alternative business models, talent wars and data security threats are just some of the issues that this year’s survey brings to the fore.”

The research also pointed to regaining confidence in the sector as 77% of northern law firms believe the sector will grow in the next three years - up from 50% in 2013.

Previous surveys have shown that law firms’ results were badly affected by a combination of the economic downturn and an oversupply of firms offering legal services.

UK profit per equity partner (PEP) has improved across all firms, with the Top 10 average exceeding the £1m barrier for the first time since 2008 – however, more than half of the year-on-year increase was driven by a 5% reduction in full equity partner headcount.

Bill MacLeod added: “The survey paints a brighter picture for the future of law firms than a year ago. The majority of firms surveyed expressed confidence about their growth prospects over the coming three years. Merger activity looks set to continue in the region with nearly a third expecting to merge by 2017.

“With challenges around the business model, changing client demands, and talent retention, law firms are operating in a very different market to that of five years ago. Recent law firm failures and enforced mergers are a reminder that the tide can turn very quickly.

“Change in the legal sector is set to continue, and firms looking for success and substantial growth will require clear leadership and vision, strong discipline over business practices, and agility to ensure they are able to take advantage of new and emerging opportunities.”

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