ABSs and stagnant economy pushing big firms towards merger, Deloitte predicts

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Rising fee income: modest predictions for 2012/13

Merger activity among the country’s top firms is likely to increase as they grapple with both the Legal Services Act and a stagnant economy, leading accountancy firm Deloitte has predicted.

Its latest research on the state of the top 100 firms found that they achieved a 6.6% increase in fee income for the financial year ended 30 April 2012 – with increased fee-earner headcount one of the key reasons – and foresee income growing a further 5.7% in the coming year.

The 26-50 tier enjoyed the highest rate of growth at 9.7%, boosted by merger activity and the recruitment of lateral hires, Deloitte said. Firms with an international presence saw some of their offices outside of the UK, particularly in emerging markets such as Asia, perform well. Furthermore, some firms achieved very strong results, despite the downturn, due to their focus on specific practice areas, such as litigation.

Despite a small decline in chargeable hours per fee-earner, the figures for the final quarter of the financial year suggested a slight increase in rates has been achieved compared with the prior year.

Deloitte’s research found that on average law firms are expecting growth to continue in the current financial year. They are forecasting an increase of 6.7% for Q1 and an annual fee income increase of 5.7%.

Jeremy Black, partner in Deloitte’s professional services group, said predictions of this modest rate of growth are “not surprising”. The sector remains cautious given the “broadly stagnant domestic marketplace and questions over the future of the Eurozone. In addition, the sector is also grappling with unprecedented structural changes following the recent introduction of the Legal Services Act”.

He continued: “This combination of factors is driving firms to review their strategy, organisational structure and future investments. As firms attempt to differentiate themselves to achieve a competitive advantage, we expect to see more merger activity as this is one route through which firms are able to broaden their service offering to clients, and win a greater share of clients’ legal spend.”

Mr Black said the 2011-12 figures showed a positive level of fee generation, especially when considering the financial climate. “Nevertheless, firms have continued to face challenges as a result of intense competition, pressure on rates, and a transfer of risk through the increased demand for fixed fees. The ability of law firms to control costs against a backdrop of high inflation will be key to maximising the profitability delivered by this revenue performance.”