Interpreting law firm results is more challenging this year than it has ever been. There are a number of reasons for this, including the increasing complexity of law firms both in terms of the variety of work they perform and their international footprints; the significant exchange rate fluctuations; and the fact that fewer results have been published as many firms have been less keen to publicise their figures than in previous years.

Analysing the results that have been published without adjusting them to take into account exchange rate movements can lead to conclusions that are, in some cases, fairly wide of the mark. How does performance look if exchange rate movements are factored in, and what are the implications for the large international UK law firms going forward?

At first glance, the largest firms (those in the top 10) had, on average, a better year than the rest of the top 50, with annual fee income growth of 6% compared with a figure of about 1%. One of the reasons for the superior performance was exchange rate movements, with the strengthening of certain currencies, particularly the euro and the dollar against sterling, resulting in overseas revenues boosted on conversion. But how big an effect did exchange rate movements have?

If one was to assume a global firm has 50% of its revenues derived in the UK, 33% from countries using, or aligned to, the euro and 17% from countries using, or aligned to, the dollar, then the boost to annual fee income as a result of the exchange rate movements would have been 8%.

As far as the results for the last quarter (which perhaps provide the best indication of current performance) are concerned, the largest firms suffered a 5% drop in fee income, which was in line with the drop of the other firms in the top 50. However, exchange rate movements quarter on quarter were even more significant and would have boosted the results by 10% for a firm with the revenue split alluded to above. The exchange rate impact goes some way to reconcile the 5% drop in fee income, with the much larger falls of 11.5% and 7.7% in chargeable hours per fee earner for firms in the top 10 and the others in the top 50 respectively.

The exchange rate movements have, to an extent, mitigated the severe impact of the credit crunch on the large global firms. However, the benefits are not without cost. For firms that operate some form of lockstep profit-sharing system, the exchange rate movements may well have caused tension among partners. In firms where the partner profit shares are calculated with reference to sterling profits, the exchange rate movements will have had a perverse effect as, despite the partners in foreign-denominated offices contributing more in sterling terms, their profit shares in local currency will have fallen.

The shift in exchange rates will also have implications in the battle between firms for partners with significant client followings. As a result of the exchange rate movements, the amounts that need to be paid by a US firm to entice a UK partner away from a large UK firm will look far more attractive in dollar terms given the significant appreciation of the dollar.

Looking forward, the UK-centred global firms face the added risk to their results in the year ahead from an appreciation of sterling. Sterling has recently rallied against the dollar and it is currently 14% above the average rate for the quarter to April 2009. As far as the euro is concerned, the latest forecasts suggest that the large euro economies will face some of the toughest challenges in the year ahead, which may well impact the euro's strength. The strengthening of sterling will not only lead to a reduction in overseas revenues but may also cause pricing issues, with international rates appearing high compared with local rates.

For those firms with significant overseas operations the prospect of a drop in activity coupled with adverse exchange rate movements could be the perfect storm they hope they will not be forced to navigate.

Jeremy Black is an associate partner in Deloitte's professional practices group.