A third of small and mid-sized practices are considering merging in the next two or three years and one in five are likely to seek external investment, according to the results of the Law Society Law Management Section’s latest benchmarking survey.

The report, published today, revealed that while firms are looking at merging with other law practices, mergers with an independent financial adviser, accountancy practice, estate agent or other non-lawyer were considered unlikely by the vast majority.

Of the 166 firms that responded, one in five said they were likely to seek external investment for expansion, and a similar number thought it likely that they would bring in one or more non-lawyer owners, for example, in HR, IT, or finance or their spouse.

One in six reported that they would sell the practice to a third party if the opportunity arose.

Firms had less appetite for joining groups or networks, such as QualitySolicitors, Connect2Law or Local Law, with less than 10% thinking their practice would be likely to join one in the next few years.

The 13th annual health check on the profession shows that median fee income increased by 3.6% in 2012 as firms continued to adapt to challenges in the legal marketplace, better than the 1% growth seen last year.

While this is positive news, the report notes that with inflation hovering around 3% this means that there has been a small amount of growth in real terms.

Median fee income per equity partner rose 2.4% from £545,568 in 2011 to £558,773 and net profit per equity partner was up 3.6% from £116,432 to £120,677.

Average fees per fee earner also rose to £119,313, compared with £116,201 in 2011, an increase of 2.7%.

The number of redundancies made during the last year continued to fall, with 3.2% of staff losing their jobs. Meanwhile, almost 80% of participants recruited new staff - in total, they recruited 824 new staff.

With the imminent ban on referral fees for personal injury work, participants were asked how much they paid for on referrals, showing that a median 9.7% of fee income from personal injury and clinical negligence work was paid over to providers, down slightly on last year.

The trend to outsource key functions in order to reduce costs and improve the bottom line continued, revealing that 46% of practices outsource their IT infrastructure and development, with a similar percentage also outsourcing their IT user support.

Approximately one practice in six outsources secretarial support, 11% outsource their reception function and 37% outsource their payroll function.

Despite continued challenges, firms are slightly more confident looking ahead than they were last year, predicting a median growth of 3.6% in the year ahead, compared with the 3% median growth predicted for 2011/12.

LawSociety president Lucy Scott-Moncrieff said: ‘There's no one-size-fits-all approach that will help firms emerge from the recession or adapt to tough market conditions facing the sector, but for many law firms, a robust management system underpins their success.’

Chris Marston, head of professional practices at Lloyds TSB Commercial, which sponsors the survey, added: ‘This year’s survey results demonstrate once again the remarkable resilience of the solicitors' profession.’