Slower growth and lower profit margins in the face of more challenging market conditions is the picture for the top 100 UK law firms in 2016, according to the latest annual survey by accountancy practice PwC.
The report, The 2016 Law Firms Survey, finds that 75% of the firms surveyed enjoyed revenue growth in the past year, still a positive number but down from the 82% recorded in 2015 – a record year, but one followed by market challenges causing increased pressures on pricing and margins.
In addition, productivity has decreased – due to a drop in chargeable hours – whereas salaries increased. However profit per equity partner in the UK remains largely flat, through tight control of partner headcount.
The top 50 firms increased fee earner headcount by 7.6% on average, an investment that has yet to yield significant revenue growth, PwC concludes. Against this backdrop, consolidation through lateral hiring programmes and firm mergers is again on the rise.
David Snell, partner and leader of PwC’s Law Firms Advisory Group, commented: “As confidence returned to the sector last year, firms increased headcount in anticipation of continued improving market conditions. However, with the market turning out to be more challenging than expected and with increased competition from US firms and new entrants, spare capacity is now an issue for firms.
“This situation is likely to be exacerbated following the EU referendum vote in favour of Brexit. Profit per equity partner and rate per hour are under pressure in a sector where supply outweighs demand.”
He added: “Despite partner numbers being tightly controlled, spare capacity has increased and is a cause for concern, particularly with the increased uncertainty around Brexit. Workforce management and deployment has remained unchanged for many years and we expect the better performing firms in the future will be those who can improve the agility of their workforce both between practice areas and globally."
The survey also reports that UK law firms have been particularly successful in expanding on an international scale to meet client need. The challenge for top tier firms to match US performance in terms of fee income and profit growth continues. While this growth has been flat for the UK, rates of 2.9% and 3.2% respectively have been reported for US counterparts. However the report concludes that the better international performance is largely attributable to foreign exchange fluctuations.
Mr Snell said the successful firms of the future were likely to provide global services supported by virtual collaboration and widespread use of artificial intelligence – something that would make it imperative to redefine roles of the existing workforce to avoid further spare capacity.
“The UK legal sector has shown its resourcefulness and ability to adapt over the 25 years of our survey", he observed. "Despite the many challenges we see this year and ahead, the sector is in good shape with many successful firms with the resources to meet future uncertainties.
“However, increased competition, changing client demands and rapidly evolving technology will all require attention and financial resources. Firms will need to continue to innovate, remain agile and find new ways to finance what will be a period requiring significant financial investment.”
On Froday The Lawyer magazine reported its own findings that the top 100 UK firms achieved an overall rise of 5% in revenue in 2015-16, from £19.24bn to £20.13bn, and profit growth of 4.7% to nearly £6.5bn, on a total headcount up 4% from 52,629 to 54,924.