Global financial performance

Overview

Global financial performance has been relatively strong in 2019, with 80% of Top 10 and 86% of Top 11-25 firms delivering fee income growth in excess of 5%. This was accompanied by profit growth in most firms: 80% of Top 10 firms grew net profit (by between 4% and 11%), whilst three quarters of Top 11-25 firms grew profit (by between 1% and 18%). These are positive results, particularly given the challenging nature of both the UK and global markets.

Average fee income increased in the Top 10 by 6.1% to £1,037m, and in the Top 11-25 by 8.1% to £270m. Profit growth averaged 6.5% to £406m for Top 10 firms, and 5.8% to £92m for Top 11-25 firms.

Global firms are responding to the ever increasing pressure on UK fee income and profits by focussing their growth efforts on the international market - a strategy which is paying dividends.

  • Strong global performance at both a fee income and profit level:
    • Top 10 average fee income £1,037m (2018: £980m, +5.8%)
    • Top 10 average profit £407m (2018: £388m, +4.7%)
  • International offices, for the second year running, are the biggest contributors to growth. With ongoing uncertainty over the UK economy, likely that global firms will continue to focus growth efforts on international operations.
    • Top 10 firms: 77% of fee income and 85% of global profit growth are sourced from international offices
  • Margins under pressure (before full and fixed share equity remuneration) down in Top 10 (1.4 percentage points to 36.5%) and 11-25 (0.7 percentage points to 33.6%).

AT A GLANCE

Global financial performance

Global headcount

  • Top 10 firms have increased headcount, with a 1.7% and 14.8% increase in partner and fee earner numbers respectively.
  • Partner headcount is up in Top 11-25 firms by 3.8%, but fee earner numbers have reduced by 3.5%. The latter is in stark contrast to fee earner growth of 59% between 2016 and 2018, with these firms now looking to consolidate their investment in workforce to improve profitability.

Global fees

  • Average global fee income has grown by 6.1% to £1,037m for Top 10 firms, with 80% recording growth of between 5% and 11%. The remaining 20% experienced a 1% reduction in fee income.
  • Top 11-25 firms grew global fees to £270m (up 8%), with half recording growth of between 11% and 16%, 38% recorded growth between 5% and 10% and the remaining 12% reported minor reductions in fee income.
  • 74% of Top 10 fee income growth was achieved through improved international performance (up £44.0m), compared to UK growth of £16.2m. In Top 11-25 firms, this split was more even, with UK and international growth of £10.0m and £8.4m respectively.
  • Movements in foreign exchange had only a limited impact on fee income movements. Top 10 firms saw a reduction of £0.7m and Top 11-25 firms experienced a rise of £1.7m.

Global profits

  • Top 10 firms recorded average profit growth of 6.5% to £406m. Top 11-25 firms fell short of Top 10 performance, with an average profit increase of 5.7% to £92m.
  • 77% of Top 25 firms grew profits, whilst the remaining 23% experienced falls in profit of between 6% and 10%.
  • International offices contributed more to profit growth than UK firms. For Top 10 firms, international offices grew profit by 9.5% before accounting for exchange rate movements (equating to £20.9m of global growth) compared with 2.8% in the UK (or £4.8m of global growth). The story is similar in the Top 11-25, with 11.4% (£2.8m) international and 3.0% (£1.8m) UK profit growth respectively.
  • Top 10 firms’ global net profit margin (before full and fixed share equity partner remuneration) has increased slightly, by 0.1 percentage points to 38.0%. Top 11-25 firms
    posted a 0.7 percentage point fall to 33.6%, mainly due to an increase in staff costs.

Movements in foreign exchange rates

  • Movements in foreign exchange rates have had limited impact on law firms in the current year.
  • Top 10 firms’ fees and profits were negatively impacted by movements in foreign exchange rates, by £0.7m and £1.0m respectively.
  • Top 11-25 firms benefited from foreign exchange rate movements, by £1.7m on fees and £0.4m on profits.

International analysis

  • All Top 10 regions increased net profit margins by between 3 and 6 percentage points, with the exception of (i) Africa, where the net profit margin increased from an average of 11% to 21%; and (ii) Australia, where there was a fall of 9 percentage points to 24%.
  • Top 11-25 firms’ performance was more mixed. Western Europe and Middle East both recorded falls of 7 percentage points to 13% and 6% respectively. China also increased their net profit margin from 4% to 16%, whilst Rest of Asia and Far East recorded a fall of 2 percentage points to 21%.
  • The UK to international profit margin performance gap is narrowing. Top 10 UK net profit margin now stands at 35.5% and this is 1 percentage point ahead of Western Europe performance. The gap has reduced for most other regions, but remains significantly behind UK.

UK top tier vs US top tier

  • UK top tier firms continue to be outperformed by their equivalents in the US in respect of all KPIs; for example, average US top tier PEP stands at £2.4m, significantly ahead of the UK top tier performance of £1.3m.
  • Average fee income and net profit in US top tier firms grew by 9.0% and 9.3% respectively and this compares with the UK at 6.4% and 5.2%.
  • In the US top tier, 35% of firms achieved double digit revenue and profit growth. This compares with 13% and 38% respectively in the UK top tier.
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Kate Wolstenholme

Leader, Law Firms Advisory Group, PwC United Kingdom

Tel: +44 (0)7740 923078

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