Nearly a third of law firms in the North are “very likely” to merge in the next three years as pricing pressures and cost reduction challenges take their toll, according to a new survey.
PwC’s annual survey of the Top 100 law firms shows that the medium-term survival of some of the region’s practices is at risk.
The survey found that 2013 has been a watershed year for the legal sector in the North. Merger activity and restructures are consolidating and polarising the market, from those that are growing to those that are struggling to survive.
And it seems that it will continue to be testing times for the sector, as 29 per cent of firms think it is very likely that they will merge in the next three years and 43 per cent thinking it is fairly likely.
However, the North was the most positive of all the English regions surveyed, with 37 per cent of firms very confident they are on track to see revenue growth this year, compared with just 20 per cent in the Midlands and 26 per cent in London. The figure increases to 50 per cent when looking at revenue growth over the next three years.
David Thurkettle, director at PwC in Sheffield and co-author of the report, said: “Against a challenging backdrop, 2013 could be seen as a turning point for the legal sector as certain firms remain resilient and grow, while others continue to struggle, with the gap between best and worst performing widening further.
“The legal sector has come under increased scrutiny from banks and the sector’s regulator following a number of well-publicised law firm insolvencies, mergers and acquisitions in the region. And this trend is set to continue with further consolidation of the market very likely.”
The PwC survey also noted that certain Northern firms achieve higher profits per equity partner (PEP) than any other region outside of London, with 13 per cent receiving between £501,000 and£750,000.
Nationally, PEP for the Top 100 law firms averaged £1m, up 6.1 per cent on 2012.
The trend in net profit margins remains a concern for smaller and regional law firms, with one third recording net margins of less than 20 per cent, and a number approaching single figures.
PwC found that productivity in law firms, relative to the height of the market in the mid-2000s, remains low and consequently pressures remain on both headcount numbers and salary levels.
Mr Thurkettle added: “Continued focus on cost reduction and innovative delivery is required across all firms to maintain profitability in a highly competitive UK market.
“We expect many firms to look carefully at their strategy, focusing on whether there is a sustainable presence in each region of operation.”
He added: “Some clear winners and losers will emerge over the next few years.”