Law firm mergers looming as fee growth stumbles

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MORE mergers are on the cards in the UK’s legal sector as it faces tough market conditions, according to analysis published yesterday.

The UK’s top 100 law firms achieved fee income growth of 3.5 per cent in the quarter ended January 31 2013, compared with the same period last year, according to the latest Quarterly Legal Sector Survey from business advisory firm Deloitte. Deloitte’s analysis has revealed a pattern of “relatively subdued” growth during 2012.

As a result, firms have lowered forecasts for annual fee income increases. A Deloitte spokesman said: “At the start of the financial year, the sector predicted 5.7 per cent growth. However, this quarter’s expectations for annual revenue increases have been adjusted to 3.3 per cent. While the top 10 firms achieved the lion’s share of growth this quarter, with nearly double the sector average (7.4 per cent), even the market leaders remain conservative, estimating a total annual rise of only 2.7 per cent.”

Clare Boardman, the head of Deloitte’s professional services practice in Yorkshire, said yesterday: “Law firms are right to be cautious as the domestic market remains fiercely competitive while pressure on rates persists. Unfortunately, this has led to the sector forecasting annual income fee rises that are barely above inflation. With challenging economic conditions expected to continue, it has been necessary for firms to reconsider what margins can be achieved.”

However, the third quarter has seen an end to the continual fall in growth rates, which had occurred consecutively for the previous four quarters. Higher revenues have been driven by an average increase in fee earner headcount and average fees per fee earner, which rose by 1.8 per cent and 1.9 per cent respectively.

Ms Boardman added: “It is pleasing to see that growth rates have not fallen any further this quarter. However, we are far from the revenue increases witnessed this time last year. In this tough environment, consolidation in the market will continue to become a key trend. Merger activity highlights the survival of the fittest reality facing the professional services sector.”