22 October 2018

UK law firms find margins squeezed

Law firms have achieved income growth but margins are being squeezed as they adapt to new challenges.

The PwC 2018 Law Firms’ Survey reveals that almost 90 per cent of law firms achieved fee income growth with 40 per cent of firms reporting double digit growth, with average profit-per-partner improving across the top 100 firms. However, for some firms, this has not translated into profit improvement with 32 per cent of the top 100 firms seeing a reduction in profit margins.

Falling margins

International offices contribute more than the UK to fee income and profit growth in the top 10 for the first time, and, the biggest concerns for firms are cyber security, Brexit, getting the benefit from investment in technology and the war for talent. Overall, the top 10 have seen a fall in profit margin for the fourth consecutive year while the top 11-25 firms are closing the profitability  gap on the top 10. The top 51-100 band have outperformed the mid-tier 26-50 firms over the past year, 24.6 per cent vs 24.2 per cent. On average all bandings in the top 100 have improved profits per equity partner (PEP) with this mainly having been achieved by reducing equity partner headcount for Top 25 firms. David Snell, partner and leader of PwC’s Law Firms Advisory Group, commented ‘despite current levels of political and economic uncertainty, 2018 was a strong year for the legal sector. Whilst we have seen an improvement in fee income from most law firms, profit margin erosion has continued for many as firms struggle to contain costs.’

Key concerns

Firms identified cyber threats, Brexit, the war for talent and the speed of technological change as their main concerns. In the top 10 firms 86 per cent said they were extremely or somewhat concerned about a cyberattack with the figure rising to 90 per cent for top 11-25 and 93 per cent for 51-100. According to respondents, none are planning to relocate a head office, close a regional office or relocate a shared service centre due to Brexit and only a small number of firms expect movement in partner and staff headcount. In relation to technology, 100 per cent of top 10 firms see it as a key challenge facing the sector over the next two years. David Snell explained: ‘With 60 per cent of firms reporting an information security incident in the last year, it is no surprise that law firms view cyber security as a major concern.’ On Brexit, he explained it ‘is also an imminent concern and while a small number of firms expect movement in headcount, movement in fee income and costs is expected to have a bigger effect.’