Big law firms were forced to shed partners and staff to combat tough market conditions last year, but still failed to produce any significant increase in profits, research revealed this week.

A survey by accountancy firm PricewaterhouseCoopers (PwC) showed that 40% of the UK's top 25 firms cut their number of equity partners last year, while more than half slashed fee-earner jobs.


The cuts have failed to produce the desired result, however, with 41% of top-25 firms seeing a decline in profits from the previous year, and 54% reporting only slim increases in profits-per-partner.


The next 25 largest firms fared better, with 29% achieving a significant profits rise of more than 10%.


While redundancies led to a boost in efficiency, with staff billing an average of 200 more hours last year, firms are still not making the most of junior and non-qualified staff, according to the survey. More experienced staff are billing longer hours than junior colleagues, with newly qualified staff billing 22% fewer than the survey's target of 1,512 hours per year.


Property costs are also on the increase, with 44% of top-25 firms spending more than one-tenth of fee income on property, up from less than one-third of firms in 2003.


Law firms are now looking to the domestic market rather than abroad for higher profits, according to the survey, with overseas operations returning disappointing results. More than half of the top-25 firms said that 15% or more of their fee income came from overseas offices. However, for most of these firms, the international offices contributed to less than 10% of their actual profits.


Alistair Rose, head of PwC's professional partnership advisory group, said: 'It looks likely that firms will continue to face tough market conditions and so must keep a tight rein on all costs, including staff costs. However, though this helps profitability, it does cause problems around reward and motivation.'


Giles Rubens, management consultant at Hildebrandt International, said: 'Law firms have not been managing their margins very effectively, and at many there is too much work being done at too high a level. That said, PwC's target of 1,512 chargeable hours is unrealistic for most firms.'


He added: 'Even if some firms do get their assistants' chargeable hours up to higher levels, in a lot of firms their charge-out rates are so low that this will not drive up profitability unless they have very good leverage as well [with more assistants per partner].'


The survey was based on responses from 47 of the top 100 law firms.