Crowe, in partnership with the Institute of Legal Finance & Management (ILFM), carried out a comprehensive benchmarking survey from 50 UK law firms and the results are now in.
The results are based predominantly on UK law firms’ data sent in for the financial year ending in the first half of 2022 and provides an insight into how firms performed as we entered the ‘post-pandemic’ period.
6 Key Factors
There were 6 key factors within law firms that we wanted to gather insights on, and they are as follows:
Overall, most firms reported a pleasing 2021/22 year, with over half of participants stating their results exceeded expectations and only a tenth considering performance to be slightly below expectations.
Post-pandemic demand for legal services was high.
How did the results compare with the law firms’ expectations?
- 19% greatly exceeded our expectations
- 37% slightly exceeded expectations
- 33% were as expected
- 12% were slightly below expectations
When forecasting ahead on the subject of law firm revenue in regards to the UK legal sector as a whole and for their respective firms our participants were more encouraged, although confidence was significantly down compared to when Crowe, in partnership with the ILFM, asked this question a year ago.
The participants of the survey were asked:
Did revenue growth translate into profit growth?
Crowe said there is stronger demand, combined with efficiency and cost cutting measures implemented throughout the pandemic period, has boosted year end profit pools for many.
However, as the sector got back to 'business as usual' post Covid, some firms, mostly Regional, found it harder to keep a lid on costs this year.
Crowe’s analysis on this specific factor was that just over two-thirds of participating firms grew their profit pools (77% of City and 61% of Regional firms).
City firms led the way, with greater percentage increases in aggregate profit pools and, more notably, in profit per equity partner (PEP) metrics.
Despite increased revenues, almost 40% of firms struggled to match last year’s profit levels as post-pandemic costs such as travel, business development and recruitment re-emerged.
With solid demand for legal services this year, it is no surprise to see headcount continuing to increase.
There was a 4.2% increase in headcount across all the benchmarking survey participating firms, together with average salary increases of around 5%, resulting in a near 10% increase in people costs.
City firm participants experienced less salary pressure than their Regional counterparts.
Another question asked regarding people:
From your recent recruitment hiring experience, what do you understand to be the main drivers which attract and retain talented personnel?
There were 4 clear drivers, as follows:
- 70% baseline salary
- 48% flexible / agile working policy
- 38% firm culture and values
- 33% firm brand and reputation
Crowe’s analysis from these findings were that although salary inflation was rising, the effect isn’t necessarily what we are seeing in this year’s results with the average increase per head being around 5%.
For many firms, their 2021 results also included exceptional costs – redundancy costs for some and additional ‘pandemic thank you’ bonuses and rewards for others. Both reduce the impact of year-on-year inflation here.
Working capital and lock-up findings.
Last year Crowe reported that just over two-thirds of firms planned to focus on improving lock-up and reducing their credit risk.
From the insights in this latest survey, they succeeded to do just that, with Regional firms reducing overall lock-up by seven days and City firms by one day.
Looking forward, a negative outlook for the UK economy means management teams are even more concerned about credit risk this year. The proportion of firms planning to focus on improving lock-up in the coming 12-18 months has now risen to almost 80% of respondents.
The pandemic changed the workplace in many ways and remote / agile and flexible working became a new feature for almost all firms. Crowe and the ILFM were interested to see if this had changed in this past year.
The feedback found that over a half of respondents reported that their teams are not working from the office for more than 50% of the time and it is the lawyers working in City firms who are the ones most likely to be working remotely.
Around 30% of Regional firm participants reported their people only spend approximately one day a week out of the office.
What impact did this have however on supervision and further issues?
- 65% considered remote working has a negative impact on supervision of team members
- 50% thought of this is a temporary issue
- 15% thought of this was a long-term issue
- 60% considered remote working has NO impact on connection with their clients
People, culture and flexible working along with mental health dialogue and workplace culture is something that we will see change again in the future.
The key factor of PEOPLE continues to top the list of priority risks for most firms, with training and development coming into greater focus this year.
The ILFM’s theme for many of our events in 2023 focus around training and development (for both mental wellness and of course risk management).
The findings show that the firm participants remain relatively unconcerned about the availability of funding, although a greater proportion deem it a higher priority than this time last year.
In terms of law firms’ immediate focus, managing credit risk continues to take a lead but this year there is a notable increase in the number of firms working on improving their environmental sustainability impact – from around half of participants last year to nearly 70% this year. Partners and owners are thinking of changing their practice model.
To read the FULL BENCHMARKING SURVEY RESULTS CLICK HERE
The ILFM would like to thank Crowe’s team, especially to these three Partners!
- Ross Prince, Audit
- Nicky Owen, Partner
- Steve Gale, Professional Practices and Head of Audit
They have worked so hard at analysing the survey data for us to glean the data as a benchmark to work with.