UK operating and financial performance

2014 Annual Law Firms’ Survey

Most UK law firms have increased fee income and profits in the last year; however, fees and gross profit per chargeable hour has fallen indicating pricing pressures. Pricing decisions have a big impact on profitability and we expect this to be an area of focus for all law firms for the medium term.
  • The number of UK firms increasing UK fee income is higher than any time since 2008: 70% (2013: 43%) of all firms increased UK fee income above inflation.
  • All bandings of firms, with the exception of Top 26-50 firms, increased average net profit margins. Top 10 firms recorded their highest ever average margin at 40% and Top 11-25 firms have begun to reverse the previous five year trend of margin deterioration, posting an increase from 26.0% to 28.2%. Top 26-50 firms posted a fifth consecutive year of margin decline to 24.1% and now stand 0.2 percentage points below the average net profit margin for Top 51-100 firms.
  • Increases in net profit margins have been achieved mainly through reduced fee earner numbers and increased chargeable hours. Top 26-50 firms, however, have seen increased fee earner numbers on average with lower levels of staff utilisation. This has resulted in a higher staff cost ratio for this category of firms.
  • All bandings of firms have seen fee income per chargeable hour fall. This, linked with increases in chargeable hours to near 2008 levels, suggests firms are busier, but pricing pressures remain acute.
  • Top 10 firms’ gross profit margin per chargeable hour is 4.3 percentage points ahead of the mid-tier, whilst the difference amongst the Top 11-100 bandings is 3.1 percentage points.
  • Improving profitability appears to have been a key focus for a number of firms: 58% (2013: 45%) of all firms recorded profit increases at a higher rate than the increase in fee income and the number of firms reporting both fee income and profit reduction is just 7% this year (2013: 25%).
  • Whilst the results in the 2014 survey reflect an improvement in revenues and profits for many firms, all financial KPIs are still short of 2008 inflation adjusted levels – in particular profit per full equity partner where the bandings are between 21% and 29% behind 2008.