The UK’s Top 10 law firms have maintained their relative breakaway performance over the rest of the sector, despite an average 21% fall in profit per partner over the last year, according to the latest annual survey of the financial performance of law firms by PricewaterhouseCoopers LLP. The overall average decline in profits for the Top 100 firms was 30%.

The survey, now in its 18th year, shows that average profits per partner of the Top 10 at £872,000 were almost twice that of the next tier (11-25) at £444,000. Many firms in the Top 11 to 25 have performed relatively badly in the recession for a number of reasons. They have seen the greatest average fall in UK income; they have been operating in the most competitive and depressed areas of the market such as transaction and deals; and have reduced partner and fee-earner numbers on average less than other firms.

Alistair Rose, partner, PricewaterhouseCoopers LLP, said:

“This year has seen the greatest turmoil in the law firm sector since our survey began in 1991. It was quite clear when our last survey was published that law firms would be far from immune from the economic crisis. As it turns out, the impact has been even greater than we anticipated across the sector. A relatively small number of firms predicted the likely extent and severity of the recession and started to cut headcount and take out cost early in the second half of financial year 2009.”

The survey shows business confidence remains weak among firms with none of the Top 10 ‘very confident’ about prospects for revenue growth over the next 12 months. Against a backdrop of continuing challenging economic conditions and chargeable hours falling by up to 20%, some firms are expected to continue with staff headcount reductions in FY 2010. Across many grades of staff, chargeable hours are now running at levels below that of 2006. There is also severe pricing pressure which is putting even greater strain on firms’ operating models.

Overseas revenues have been increasingly important for the larger firms, aided substantially this year by currency movements. Three quarters of the Top 10 firms now earn more than 40% of all fees from international operations. However, profitability has been hit hard, particularly in the Middle East, Central and Eastern Europe and the Far East.

During the recession it was expected that all firms would focus heavily on working capital and the survey confirms this. For the Top 10 lock-up has fallen to an average of 124 days from 132 days in 2008.The 11-25 category remained the best performers with average year end lock-up at 105 days, well below the PwC benchmark of 110 days. Firms have also faced significant pressures given increased levels of borrowings and banking covenants.

The survey also pointed to an increasing trend towards outsourcing a range of business support functions. This not only included traditional areas such as payroll, IT and facilities management, but there was also strong indications of interest in outsourcing areas such as accounting, HR and procurement. Although there is still little evidence of an appetite for legal process outsourcing in the survey, with many new players entering this market, this is expected to be a growing area for firms as they seek to reduce costs further.

Alistair Rose, partner, PricewaterhouseCoopers LLP, added:

“Looking to 2010 and beyond, we believe structural change in the UK legal profession is clearly underway. The catalyst of the recession has led firms to focus on becoming more efficient, reducing cost by structural change, as well as significant cuts in both fee earner and support staff headcount. There is still some way to go in this respect.

“Fierce competition has made firms think hard about how to become distinctive in the eye of the client. Client relationship and engagement management, sustainability and innovative delivery models are all moving fast up the agenda as a result. The recession has put some operating models under severe stress and survival in the current form for some firms may prove a challenge if market conditions do not rapidly improve.”