Survey: PwC says profit margins are under pressure and fee-earner productivity is falling

The past 12 months have been 'another exceptional year' for most large law firms, with fees and profits per equity partner (PEP) showing significant increases, research has found.


The annual survey of the largest law firms from accountancy firm PricewaterhouseCoopers (PwC) said that average fees per partner at the top 25 rose to £1.8 million in 2006, up 8% on 2005 and 25% on the year before.


Average PEP was up 13% (35% from 2004) to £599,000, with a quarter of the top 25 seeing it top £750,000.


Two-thirds of the largest firms saw their fee income grow by at least 10%, compared to just 22% last year. All increased PEP, with 30% recording growth of more than 20%.


The success was attributed to both strong market conditions and firms keeping tight control over the equity partnership - partner numbers were reduced at more than half of the top 25. This trend was reversed among the top-ten firms.


The report warned that firms with a policy of limiting equity partner ranks will reach the stage of either having to relax control of the equity or risking the loss of senior staff.


However, the report indicated that the headline figures were masking potential problems. Profit margins are under pressure, it found, and individual fee-earners' productivity is falling, with average billable hours down at every level from equity partner to newly qualified when compared to 2005. There are also continued salary pressures, and high levels of qualified staff turnover.


The survey examined seven specific practice areas, and found that gross profit margins were down in corporate, litigation, property, intellectual property, construction and banking. Only insolvency was up. It put this trend down to high staff turnover and decreased productivity.


Alistair Rose, leader of PwC's professional partnership advisory group, said: 'Firms are again budgeting for a strong performance in 2006-2007, with more than 80% in each size category assuming a rise in profits per partner and an increased number of fee-earners. The strong financial performance per partner is also not necessarily seen as sustainable, as a larger number of firms in the top 25 are predicting an increase in their partner numbers, although the top ten remain more conservative, with only half expecting to have more equity partners, but a large majority expecting more fixed-share partners.


'Given that average fee income for the top 25 law firms has grown over the last three years by 48%, while average partner numbers have risen by only 1%, managing partners will need to consider whether this model is sustainable.'


Nine of the top ten, and 21 of the top 25 firms responded to the survey.