A recent PricewaterhouseCoopers survey indicates that a quarter of the top UK law firms are turning to legal process outsourcing, as income for UK law firms in general has gone into free fall. Most UK law firms have seen lower revenues in the last year, driven by downward client pressure on pricing, together with a general contraction in the world market for legal services, according to PwC's 2010 law firms' survey.
In response to the decline in revenues resulting from the Western economic recession, many firms have turned to offshore legal outsourcing (LPO) and other cost reduction and restructuring programmes as a way to preserve profitability. The firms ranked 11-25 have seen the greatest pressure on revenues, the survey finds.
The survey indicates that the top 10 firms have benefited from scale and reach. The 11-25 tier, however, has continued to experience difficult market conditions. Outside the Top 25, a number of successful niche practices have emerged within the 26-50 ranking, with 5% of these firms reporting growth in fee income of between 11% and 15%.
Alistair Rose, partner and leader of the PwC professional partnerships advisory group, commented as follows:
"As in 2009, Top 11-25 firms have been under continued pressure on profitability. Despite an 8% reduction in their partner numbers and a 6% reduction in fee earner numbers, average profit per equity partner (PEP) still fell by nearly 1% to £441,000. This follows a 28% reduction in PEP in 2009. While our survey shows the Top 10 maintaining their breakaway position, it's worth noting that their average profit per partner is still some 17% lower than PEP in 2008.
"With a focus on cost reduction in 2010, it is not surprising that headcount reductions have been made by most firms. There is a notable difference, however, in the reduction in fee earner numbers, with the Top 10 scaling back by, on average, 6% compared to the 10% average reduction for the 11-25 firms."
The PwC survey suggests that support staff levels have been reduced in greater proportion than those for fee earners, supported in part by greater use of offshore outsourcing. Over the last two years, support staff numbers have been reduced by, on average, 25% in both the Top 10 and Top 11-25 firms.
"With the sustained market and financial pressure, it is perhaps not surprising that the number of Top 11-25 firms predicting mergers as 'fairly likely' in the next two to three years has risen from half of those firms in 2009 to 83% in 2010," Rose added.
The survey notes how partnership financing recently has received much attention. Recent concerns over the availability and cost of bank funding to law firms appear to have been over-stated as, in aggregate, the level of bank funding to law firms has increased. However, the increase in the level of external financing is of note, particularly in view of recent high profile law firm failures. While Top 10 firms and those ranked 26-50 are opoerating at relatively conservative levels of external funding (26% and 33% respectively of total funding), it is again the 11-25 firms where the numbers are at their starkest (40% external financing, an increase of 13% from 2009).
The decline in headcount, together with other cost reduction steps, have resulted in a substantially lower cost base for many firms. Outsourcing of various processes continues to rise, and many firms envision more outsourcing measures in 2011 and beyond, particularly IT, accounting and HR. Regarding legal process outsourcing ( LPO ), the top 10 firms are leading the way. 25% of them already taken steps in this direction, with Asia, the Far East and Southern Africa the favored destinations.
PwC's Alistair Rose concludes as follows:
"Looking ahead, it appears the legal sector is approaching a tipping point. Many of the larger Top 10 firms have used the recent economic difficulties to focus on making their businesses more efficient and have taken innovative approaches to both back-office support and how they provide legal services. There is further to go, however, and firms acknowledge there is still a significant information gap in their understanding of clients' preferences and needs.
"There is ongoing pressure on firms ranked 11-25 and it is inevitable that a number will need to consider their response to ongoing, difficult market conditions, client pricing pressures and new entrants to the market."