UK law firms operating and financial performance

2013 Annual Law Firms’ Survey

Increased fee income does not always translate to improved profit. In accepting engagements and pricing work, firms need to consider whether they are generating the right type of work which is aligned to the core strategy of the firm, and whether the fees agreed are generating the desired profit and margin to help the firm meet its targets and ambitions.

We expect pricing competition to remain intense, especially in the mid-tier, as larger firms extend their dominance, smaller niche firms seek to capitalise on their specialisms, and new players enter the legal market with lower and/or more efficient cost offerings.

  • After allowing for inflation and consolidation in the market, UK fee income has remained relatively flat across all bandings, reflecting ongoing pricing pressures and challenging economic conditions.
  • Only Top 10 firms succeeded in increasing UK net profit margins on average; while all bandings outside the Top 10 have recorded another year of declining margins.
  • Approximately one third of all firms outside the Top 10 reported UK net profit margins of less than 20%.
  • Average UK net profit margins before fixed share equity remuneration for Top 11-25 firms stands at 29.9%, lower than the average for Top 26-50 firms (32.4%) and only 0.3 percentage points ahead of the Top 51-100 firms. This compares with an average net profit margin before fixed share equity partner remuneration for Top 10 firms of 40.7%.
  • Top 10 firms’ fee income and gross profit per chargeable hour performance has increased (by 11.8% and 11.4% respectively), although gross margin has remained relatively consistent at 71%.
  • Top 26-50 firms’ fee income and gross profit per chargeable hour has grown above that of the Top 11-25 firms’ performance; they are now 11.6% and 10.1% ahead respectively.
  •  UK fees per fee earner fell for both Top 10 and 11-25 firms, by 3.3% to £353k and 11.3% to £235k respectively. The Top 11-25 firms’ performance is at the lowest level since we began monitoring this KPI in 2005. Reduced utilisation is impacting this KPI for the Top 11-25, particularly at the >5 year PQE level. It would also appear that firms have still to fully adjust their headcount down to optimum levels following recent merger activity.
  • Top 10 firms’ profit per fee earner, at £143k, is approximately 2.5 times greater than the Top 11-25. Top 11-25 firms’ average performance now stands at the same level as the Top 26-50 firms (£60k profit per fee earner).