UK financial performance

Introduction

In isolation, UK fee income performance appears strong, with 89% of firms showing fee income growth compared with 84% the previous year. However, the average rate of growth across firms has declined against 2018, from 8.3% to 5.9%. Last year, half of Top 10 firms grew fee income in excess of 10%; this year, none exceeded single digit growth. Despite nearly a quarter of Top 11-100 firms recording double-digit fee income growth this year, that fell from 38% in 2018.

It is clear that there continues to be significant pressure on profits in the UK legal sector. For example, in the Top 51-100, all firms increased fee income, but nearly a third experienced profit falls.

Average profit per equity partner (PEP) continues to grow and has reached record highs across all bandings, but this is generally due to movement (or management) of partner headcount.

At a glance

UK financial performance

Fees

  • More firms experienced fee income growth in 2019: 89% of the Top 100 vs 84% in 2018. However, the average growth levels have been reduced from 8.3% in 2018 to 5.9% in 2019.
  • Top 10 and 11-25 firms grew UK fee income by 4.1% and 6.3% respectively (2018: 5.0% and 9.2%). Top 26-50 and 51-100 firms grew by 3.3% (2018: 7.2%) and 9.2% (2018: 10.0%).
  • Top 51-100 firms saw the greatest proportion of firms achieving double digit growth at 36% (2018: 29%). This compares with no Top 10 firms (43% in 2018), 27% of Top 11-25 and 7% of the Top 26-50.
  • Fees per fee earner have continued to grow, at 5.1% in the Top 10 (to £415k), 7.3% in Top 11-25 (£325k), 5.8% in Top 26-50 (£237k) and 2.7% in Top 51-100 firms (£188k). These increases are despite a general trend of rising fee earner headcount in larger firms.
  • Fees per chargeable hour have increased across all Top 100 bandings, most notably in the Top 11-25 and 26-50, 7.1% and 7.0% respectively (2018: 3.9% and 1.4%) to £285 and £228 per hour. The Top 10 firms reported an average increase of 4.3% (2018: 1.7%) to £315 per hour, while the Top 51-100 reported a 0.5% fall (2018: increase of 12.9%) to £200 per hour.

Costs

  • The total staff cost ratio (excluding fixed share equity partner remuneration) remained within 1.5 percentage points of 2018 across all bandings.
  • Top 10 firms maintained the fee earner staff cost ratio at 26.7%, while Top 11-25 firms reported a fall of 1.7 percentage points to 26.6%. With known increases in legal sector salaries, this can only be attributed to fee income growth either matching or being greater than staff cost inflation.
  • Top 10 non-fee earner staff cost ratio has decreased by 1.5 percentage points to 11.2%, equating to an average additional profit of £6.4m.
  • Top 11-25 non-fee earner staff cost ratio increased by 1 percentage point to 14.5%, and this partially offsets the fall in the fee earner staff cost ratio noted above.
  • In all bandings, the gross profit margin per hour increased, both by value and margin percentage. This was due to the increase in fee income per chargeable hour exceeding the increase in fee earner costs per chargeable hour. Top 10 firms’ fee earner cost per chargeable hour has increased by 5.1% to £103, while fee income per chargeable hour has grown by 4.3%, effectively adding £8 to the bottom line for every additional £13 of fee income.
  • Top 51-100 firms is the only banding where cost per chargeable hour fell by 3.5% to £83.

Profits

  • A significant number of firms continue to feel pressure on profits, with over one third of all Top 100 firms reporting falling profits in 2019 (2018: 29%). Of the 89% of firms reporting fee income growth, just under two thirds translated this into increased profit.
  • The trend of declining profit margins has continued for Top 10 firms for a fifth year, from 40.0% in 2014 to 35.5% in 2019 (36.6% in 2018). Top 11-25 and 51-100 also reported falling margins; by 0.3 percentage points to 28.5% and by 1.7 percentage points to 22.9%. Top 26-50 firms were the only banding to increase the net profit margin, from 24.2% to 24.7%.
  • The Top 10 to 11-25 firms’ net profit margin performance gap continues to narrow. This was 11.8 percentage points in 2014 and is now 7.0 percentage points.
  • Despite falling margins, average PEP continues to grow and has reached record highs across all bandings. This, in part, is a result of movement (or management) of partner headcount.
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Kate Wolstenholme

Kate Wolstenholme

Leader, Law Firms Advisory Group, PwC United Kingdom

Tel: +44 (0)7740 923078

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