There's a lot of numbers out there that give clues to how firms perform in a recession

How do you gauge the performance of law firms in any given year? For what it's worth, at Legal Week our starting point is historical data. The early-1990s recession isn't much help, as figures back then were comparatively scarce, and firms were totally different animals. But there are reliable numbers on major firms from the previous decade. Looking back at the last cyclical downturn, we can get a sense of how the top 50 perform in slower deal markets. In 2001-02, the group as a whole saw revenue growth slow to 8.6%, while average profits per equity (PEP) fell 0.9%. In 2002-03, revenue growth slowed to 5.1%, while on average profits fell 1.1%. Revenue growth was at its slowest the following year, at 4.6%, but by then firms had cut costs, so profits rose by 6%. From 2004, the market took off.

Obviously, the current slowdown is far worse than that of 2001 to 2003, a period in which deal markets slumped and the TMT bubble burst – but most Western economies never got near a technical recession, let alone a banking crisis. So looking at more recent data, H1 figures for 2008-09 that show the impact of the credit crunch – but not the banking meltdown after the collapse of investment bank Lehman Brothers – gives some more guidance. The 20 firms for which we have reasonably reliable numbers are split into two camps: large City firms outside the magic circle that grew strongly off the back of busy foreign offices and a strong euro, and regional and domestically-focused City firms that generally saw static or modest income falls. Overall, the international market was still growing, but legal service demand in the UK probably stopped expanding in H1.

So what of the post-Lehman period? US law firms act as a yardstick to measure against. As they operate a similar model to UK firms, their results typically shadow large UK practices. Figures from The American Lawyer show revenue at top 100 firms was up 4.1% in 2008, which slowed from 13.6% the previous year, while profits fell by 4.3%. The harder-hit New York firms saw a general revenue decrease of around 4%, while PEP was down around 12%.

However, with four more months of recession trading, UK firms will do worse. Early indications of 2008-09 results show the chasing pack are on course to outperform the market, with roughly static revenues but lower profits. We also drew on responses from 102 partners regarding their 2008-09 results, which found 59% expecting falls in revenue year-on-year, while 24% expect income growth. Sharp currency movements over the year will also have flattered sterling revenues for City firms with substantial Eurozone practices. Given how internationally-focused the UK's top 25 law firms are, currency movements could quite possibly put 3% 'growth' onto the top 50′s sterling revenue as a whole.

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