Crunch watch: Deloitte wades in in only slightly gloomy style

Another handy indicator has emerged for anxious law firm leaders trying to predict the impact of the crunch on the legal community, this time in the shape of Deloitte’s quarterly results. The numbers, covering the first financial quarter of 2008-09, confirm that there has been a notable slowdown in growth at major UK law firms since the spring.

Annual revenue growth in the quarter to 31 July was 6.3% among the top 100 law firms surveyed. This is a notable slowdown on the 12-month growth rates seen in the previous quarters: 12% in Q4, 10.6% in Q3, 12.5% in Q2 and 15.1% in the boom time of Q1 2007 (anyone remember then?).

Obviously, that’s a hard reality for law firms that have grown used to double-digit growth in recent years, but it’s no wipe-out. And compared to many of the doomy predictions – of which Alastair Darling’s economically dubious comments are perhaps the most visible manifestation - it looks a result.

Deloitte also confirmed that larger firms are finding it easier to cope with the crunch, with top 10 practices seeing 11.1% growth over the quarter. It also put UK law firms in a similar position to their Stateside equivalents, according to research compiled by Citi Private Bank, which concluded that top 200 firms in America grew their revenues by 4.8% in the first half of the calendar year.

By common consent, everyone is waiting for the current quarter to play out before they can gauge how the credit squeeze coupled with a rapidly slowing UK economy will fully impact on law firms.

Not that getting a clear indication is easy. A common sentiment from managing partners is that they get deeply depressed reading the news until they look at their budget figures, which look rather less apocalyptic. That said, my feeling is that the full impact is still to come and, as underlined by Eversheds’ recently-announced cuts, it’s an especially tough market for domestically-driven firms with heavy property exposure.

My current feeling is that the top 50 will average 3%-5% revenue growth in 2008-09, while average partner profits will fall more than 5%. For bottom of the cycle, that’s not bad going, though it’s not going to feel that way to lowest-quartile performers.

That’s one element that will be crucial to this downturn. While 2002-03 essentially counterbalanced market trends in legal services by hitting the top performers the hardest, and in some cases bailing out those with strategic weaknesses, this time around looks set to accentuate firms’ natural market positions. For some the gloom may yet prove entirely justified.