UK financial performance

Introduction

At first glance, performance appears to have improved significantly in 2018, with higher fee income growth across the sector relative to 2017. However, ongoing challenges in UK law firm performance remain evident as increased fee income has not necessarily translated to overall profit improvement.

With Brexit on the horizon the continuing uncertain environment remains challenging for the UK legal sector. Despite many of the larger firms having Brexit committees in place to deal with the changes, 85% of all firms identified Brexit is a key challenge between now and 2020.

Watch: Kate Wolstenholme talk about UK financial performance 
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At a glance

Fees

  • Over 80% of firms increased fee income across each of the Top 100 bandings, and 91% of firms overall (2017: 75%). Average fee income growth was 5.0% and 9.2% for Top 10 and Top 11-25 firms respectively (2017: 2.5% and 2.3%). For Top 26-50 firms, average UK fee income growth was 7.2% (2017: 3.7%) and for Top 51-100 firms, 10.0% (2017: 2.5%).
  • Overall, 39% of participating firms experienced double digit growth in fee income. In 2017 this was limited to 4%. 
  • The increase in fees flows into a number of KPIs, such as fees per fee earner which is up, on average, across all bandings: Top 10 by 3.9%, Top 11-25 by 4.4%, Top 26-50 by 3.7% and Top 51-100 by 8.2%.
  • Fees per chargeable hour have increased across all Top 100 bandings. The Top 10, 11-25 and 26-50 bandings have seen increased rates per hour of between 1.4% and 3.9% compared to 3.4% and 7.6% on average in 2017. Firms in the Top 51-100 have, on average, experienced a 12.9% increase.

Staff costs

  • There has been an increase in fee earner staff costs for all bandings except for Top 51-100 firms. This is most prevalent in the Top 10 where the fee earner staff cost ratio has increased by 1.2 percentage points to 26.7%. Consistent with all bandings, Top 10 firms have controlled non-fee earner costs; therefore, the overall staff cost ratio impact is limited to an increase of 0.9 percentage points to 39.4%. This has contributed to further erosion of profit by, on average, £3.6m. Within the Top 10 there has been a mix in staff cost ratio movements, with 57% experiencing an increase in the staff cost ratio. This results in a wide ranging impact from movement in staff costs from a benefit of £9.0m to increased costs of £21.5m.
  • The overall staff cost ratio has decreased in Top 11-25 and 26-50 firms due to falls in non-fee earner staff costs, resulting in an effective profit increase of £1.4m and £0.2m respectively.
  • The increase in fee earner cost per chargeable hour exceeds the growth in fee income per chargeable hour for all bandings. Top 10 firms’ fee earner cost per chargeable hour has increased by 3.2% to £98 and by 5.3% to £99 in Top 11-25 firms. Top 26-50 and 51-100 firms recorded a 7.5% and 14.7% increase respectively to £86 (for both bandings).

Profits

  • A total of 29% of firms reported lower profits in 2018 (2017: 48%), but only 8% of firms in our survey reported a reduction in both fee income and profits (2017: 25%).
  • Profit declines were most prevalent across Top 10 and 11-25 firms, where almost half experienced falling profits.
  • Top 10 firms’ average profit margins continue to fall, from a high of 40.0% in 2014 to 36.6% in 2018. This represents a further fall of 0.3 percentage points from 2017, with the most significant factor being increased fee earner staff costs. Further, the performance gap to Top 11-25 firms is narrowing, where margins have increased by 1.1 percentage points to 28.8%, achieved through a reduction in non-fee earner staff costs.
  • A key development this year was that the profit margin for Top 51-100 firms (24.6%) has now overtaken those for the Top 26-50 firms (24.2%) following a 1.6 percentage point improvement for the Top 51-100 and a 1.0 percentage point fall for the Top 26-50.
  • Average PEP improved across all bandings. In Top 10 firms, the fall in partner headcount (from 147 to 142) was a key contributing factor that improved average PEP from £1,043k to £1,066k. With consistent partner headcount, average PEP would have fallen to £1,030k.
  • Whilst profit increases contributed to a rise in Top 11-25 firms’ PEP of 12.7% to £729k, movement in partner headcount again plays a part (fall on average from 78 to 74). With consistent partner headcount, average PEP would have been £692k (increase of 7.0%).
  • Both Top 26-50 and 51-100 firms increased PEP to £467k and £381k respectively, despite higher partner headcount.

Contact us

Kate Wolstenholme

Leader, Law Firms Advisory Group, PwC United Kingdom

Tel: +44 (0)7740 923078

Leon Hutchinson

Senior Manager, Assurance, Law Firms Advisory Group, PwC United Kingdom

Tel: +44 (0)7739 449052

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