82 of the 100 largest law firms in the UK have seen their fee income increase over the past year. Mid-tier players are catching up on top tier-players through their improving margins and Profits per Equity Partner. While more than 80% of legal advisories see the need to improve their use of digital technology, only 23% have started implementing changes.
The 2015 edition of PwC’s annual law firms’ survey explores the hard numbers and trends within UK law firms. The report is developed, as in previous years, from responses from across the largest law firms in the UK. The report also drew from interviews, a survey and other published financial information.
This years’ report finds that top-tier and mid-tier firms are facing different fortunes. Fee income is up at 82% of firms, up from 70% last year; however, the Top 10 firms fared considerably worse. 50% saw their fee increase, compared to Top 11-25 firms at 71% and Top 26-50 firms at 89%.
Net profit margins at the Top 10 firms still remains far in excess of lower banded firms, at 39.9%, the margin, however, remains flat on the year previous. The Top 11-25 firms have in contrast managed to nudge up their margins to 29.2%, hitting the highest level seen within the band since 2009. Top 26-50 firms have seen their margins improve slightly to 24.5%, thus considerably below the higher banded firm profitability. Top 51-100 firms have reported deterioration in margin from 24.1% to 21.2%.
A number of factors are contributing to the changing net profit margin fortunes within the UK law firm landscape. Firms in the Top 11-25 banding have benefitted from mergers and lateral hiring programmes in recent years which are beginning to reap benefits, and there may be more to come as firms capitalise on economies of scale and refocused growth strategies. Firms within the Top 26-50 have to the contrary been struggling with the cost of new hires, as headcount increased 8%. Their high staff cost ratio presents a competitive disadvantage from a margin perspective.
A further area of differentiation among UK law firm bands is the variation in increased UK Profits per Equity Partner (PEP). The Top 11-25 firms performed by far the best, on a 17.2% increase to £641,000. Improvements were booked through underlying profitability, given that there was only a 1% drop in equity partner headcount. The Top 10 firms, on the other hand, saw PEP increase only marginally (3.5%) to £1,067,000. This increase did not come from underlying profitability, but rather the major factor has been a 5% reduction in headcount.
The report also considers how UK law firms are investing in digital technologies. According to PwC, the vast majority (80%) recognise “the need to respond to the Digital age.” The firms respond that a number of digital technologies, including social, mobile, analytics, and cloud, will improve client experience. However, only 23% have so far implemented necessary involvements to enable their websites or mobile applications to provide that level of interaction.
The need to invest in stronger IT functionality is not merely noted by firms on the front-end; cyber security and improvement to efficiency are also on-going concerns. Cyber-attacks, particularly phishing attacks, occurred at 62% of firms - up from 40% in 2014. Although security is a reason to invest further, improvement to efficiency will see 95% of firms invest in IT projects in the coming 12 months.
In terms of bands investing, mainly Top 10 firms have increased their IT spend, typically in projects that focused on supporting the core areas of business support such as Finance, HR and Risk.