Partner profits have plummeted by more than a quarter among a large swath of corporate firms as ‘acute pricing pressure’ and a fall in work take their toll on the bottom line, according to research by accountants PricewaterhouseCoopers published today.

The PwC annual law firm benchmarking survey reveals that, while the magic circle has maintained its ‘breakaway’ performance with profits per partner of between £850,000 and £1.4m, which is nevertheless down 21% on last year, firms in the top 11-25 have been much harder hit.

These poorer performing mid-tier corporate firms have seen the greatest fall in income, with partner profits down an average of 28% to £444,000 during the 2009 financial year. The study said these firms are operating in the ‘most competitive and depressed markets’ such as corporate transactions and property and – unlike firms in all other size categories – have failed to reduce partner headcount and are still operating at 2005 partner levels.

The research indicates that there will be a significant number of mid-tier mergers in the next two to three years, with half of firms in the struggling 11-25 bracket saying that a merger is ‘fairly likely’ in this timeframe, compared to a ‘muted appetite’ for merger among other firms.

Report author Alistair Rose said the mid-tier market is ‘overlawyered’. He added: ‘The market is visibly shrinking. It is not tenable to believe that there will be that many firms [in a few years]. There will undoubtedly be some mergers, to achieve economies of scale and to enable firms to grow internationally. When things do pick up, firms will be very focused on winning the work, so there will be even more pricing pressure. This may [also] drive firms to merge.’

Profit margins were down across the board, according to the survey, with margins at the top 10 firms falling from 39% to 36%, and in the 11-25 bracket dropping from 33% to 30%. A margin of 40% would be considered good.

A significant number of firms required partners to increase their capital during the year, with half of the top 10 and two-thirds of other firms making a capital call.

Foreign offices were increasingly important for firms, with three-quarters of the top-10 firms generating more than 40% of fees from international operations, aided substantially by currency movements.

PwC obtained responses from 80% of the 1-50 bracket firms, and 61% of firms in the 50-100 bracket.