By Daniel Hunter

The UK’s top 100 law firms have seen their annual growth rate fall to less than half the rate seen last year, according to business advisory firm, Deloitte.

The sector saw a fee income increase of 2.6% for FY13 (financial year ended 30 April 2013), compared with a 6.6% increase achieved in FY12.

The modest increase this year has been generated through a rise in fee earner headcount of 2.4%, as opposed to an increase in productivity or pricing, which only rose 0.1% and 0.3% respectively. The rise in headcount is symptomatic of an increase in law firm transactions in certain segments of the legal sector.

“Law firms have faced another tough financial year. Rates remain suppressed as clients focus on value for money, while new players - such as consumer businesses and insurance companies enter the market using new business models. Consolidation continues to gather pace as the ‘survival of the fittest’ reality begins to bite across some areas of the professional services sector," Jeremy Black, partner in Deloitte’s professional services practice, said.

The latest quarterly results are in line with the sector’s annual performance. Firms achieved a 2.4% increase in fee income for Q4 (quarter ended 30 April 2013), compared with the previous year. This is the slowest growth rate seen since October 2010 and is once again driven by an increase in fee earner headcount. Growth was highest in the 11-25 category, with a fee income increase of 5.2%, largely driven by increases in fee earner productivity as fee earners increased their hours following mergers in the prior year.

Black continued: “Competition is high in a market where supply continues to outstrip demand. Firms must maintain a healthy client base and differentiate their services from the competition. Mergers are one vehicle to achieving this.”

The sector remains cautious about the opportunity to increase revenue in the coming year. The UK’s top 100 firms are predicting a 5% increase next quarter and a 3.9% annual increase for FY14.

Black concluded: “It is not surprising that the sector’s expectations for next year are conservative. Law firms must continue to navigate a relatively stagnant, yet competitive, market. Those that want to succeed in these challenging financial conditions must carefully consider their future strategy, structure and investments.”

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