CROWE's Press Release as follows:
Law firm revenues increase but surging costs drag profits
25 September 2023, LONDON: Audit, tax, advisory and risk firm, Crowe, provides a timely snapshot of the UK legal market with the results of its Law Firm Benchmarking Survey in partnership with the Institute of Legal Finance & Management (ILFM).
During a period of high inflation and a cost-of-living crisis, Crowe’s analysis looks at how the financial health of law firms has fared against expectations and assesses how firms approach a range of issues from cybersecurity to diversity and environmental, social and governance policies. Read the full report here.
Key findings include:
- Profit pools down despite fee income rises
- City firms struggle with lock-up: four-day increase on last year
- Less than a third have a well-established sustainability programme in place
- Half of firms saw revenue growth of up to 10%
- Fees per fee earner: City - £285,850; Regional - £145,673
- PEP down 21% in the City, down 10% in the Regions
- Headcount up 6.8%; personnel costs rise 13.1%
- 95% identify cybercrime as a high priority concern
After a resurgent 2021 and 2022 saw law firm revenues surge alongside profit pool increases, the 2023 financial metrics across the legal sector represent a mixed bag, according to new data from Crowe. Though demand for services remains high, costs have soared thanks to industry pay expectations and record levels of inflation.
In the City it was a tale of modest revenue growth, with two-thirds (67%) of firms seeing an increase in revenue up to 10%. Regionally the growth figures were more pronounced, with more than a third (38%) seeing growth of more than 10% (and the same proportion seeing growth up to 10%). This Regional showing was surprisingly strong, with 58% of Regional firms recording results that exceeded their expectations.
Although fee income has increased for most firms, this has not translated into surging profits, with profit pools dented by increases in people numbers and higher base line expenses, which – driven by the challenging economic backdrop – have risen to pre-pandemic levels (or beyond). As such, there was a 50/50 split between firms that saw an increase in their profit pool and those that saw a decrease. A key challenge for firms is to actively manage outgoings in the face of persistent inflationary pressures and salary costs that continue to rise.
This challenge is also reflected in fees per fee earner and profit per equity partner (PEP) statistics. In the City, mean profit per equity partner (PEP) fell 21% to £513,660, while the Regions saw a drop in PEP of 10%, to £283,047.
City and Regional firms diverge on managing lock-up
Working capital and efficiency have been a key focus in light of economic headwinds. While Regional firms recorded success in improving their lock-up by seven days compared with last year, City firms saw theirs increase by four days.
This will remain high on the agenda for next year as management teams continue to be concerned with credit risk, with 77% of firms reporting that improving lock-up is a key part of their plans in the coming 18 months.
Investment in people
Trends apparent in last year’s findings continued when it comes to headcount figures, with three quarters of firms (74%) increasing their headcount, translating to a 6.8% increase in headcount across all firms (even higher, at 8.4% for the Regions alone). A 13.1% rise in personnel costs was not surprising, in light of industry-wide pressure to increase salaries in the war for talent attraction and retention.
Reinforcing this salary trajectory trend, firms reported salary and benefits packages as the primary driver for attracting talent (71%), with 50% listing firm culture as a main driver and 40% referencing flexible working as a consideration.
Sustainability programmes vary wildly
Sustainability continues to be an area of focus, but the majority of firms have more to do, as only a third report that they are operating well-established programmes. Almost half (45%) do not yet have a structured programme or are in the process of developing one while, surprisingly, 11% of respondents said they neither have a programme nor plan to implement one.
Outlook for the year ahead
Most firms are expecting a continuation of the expanding workforce trend, with 42% of firms anticipating their partner numbers to increase and 70% expecting their fee earner numbers to increase by up to 10%.
Increased salary costs also look set to continue with 83% of participants considering pay increases between 2.5 – 7.5%. This is no surprise given the cost of living crisis with many firms providing increased salaries to support their staff.
More broadly, firms showed buoyant expectations for the year ahead, with confidence remaining high (77% of firms expect to see an improved financial performance) despite the ongoing talent war and in spite of 65% saying the UK economy will continue to be challenging.
In terms of threats, a vast majority (89%) of participants believe there is a lack of cybersecurity awareness within their firm, with most only offering training on an annual basis – a surprising discovery given that 95% of firms say they rank cybersecurity as a high priority concern.
Nicky Owen, Head of Professional Practices at Crowe, comments:
“After a strong 2022, the legal sector has seen more muted growth across most financial metrics this year, with City firms in particular battling to keep rising costs under control. If inflationary pressures and the battle for talent continue to intensify, the year ahead could see firms passing on the cost to clients through fee increases.
One worrying trend for City firms is that lock-up days have increased. Cash is king and firms will want to ensure money is coming into the business promptly to sustain their growth projections, particularly if costs continue to soar.”
Tim Kidd, Chief Executive, Institute of Legal Finance & Management (ILFM)
“Having partnered again this year with Crowe to bring the findings of this important report to ILFM members and the wider legal profession, it is clear that the main driver for attracting and retaining talent within a law firm focuses on employee benefits together with a good salary. We are pleased to have gathered vital data from our legal finance members, who are the ones on the operation floor handling and protecting client ledgers. Their input on the benchmarking survey is invaluable for data on lock-up, cashflow and revenue, together with imparting their concerns with cybercrime as 95% admitted it’s a worry. An insightful read!
Crowe is a national audit, tax, advisory and risk firm offering global reach and local expertise. We are an independent member of Crowe Global, one of the top 10 accounting networks in the world. With exceptional knowledge of the business environment, our professionals share one commitment, to deliver excellence.
We are trusted by thousands of clients for our specialist advice, our ability to make smart decisions and our readiness to provide lasting value. Our broad technical expertise and deep market knowledge means we are well placed to offer insight and pragmatic advice to all the organisations and individuals with whom we work. Close working relationships are at the heart of our effective service delivery.
To read the FULL report CLICK HERE and you will be redirected to Crowe's website.
Ben Carter is a tax director at Crowe UK and was integral to this research.