Annual Law Firms’ Survey 2021: Facing the future with confidence

UK financial performance

All Top 10, 92% of Top 11-25, 78% of Top 26-50 and 63% of Top 51-100 firms achieved fee income growth. While not as positive, the trend of increasing net profit is similar with at least 72% of firms across the bandings reporting rises.

Generally, larger firms, who have more diversified revenue streams, have been able to pull more levers to ensure better growth and profitability in FY21. It is also evident that firms with the majority of fee income invested in practice areas such as corporate and banking fared better than those whose fee income is driven by private client and high volume legal work.

The positive results on fee income have been accompanied by cost savings on travel, marketing and other non-essential spend. Furthermore, there has been a reduction in bad debt expense and this no doubt arises from reversing cautious provisions made last year. All of this has resulted in impressive profit growth and for some, record profits.

People

The impact of COVID-19 has limited headcount movements across the legal sector, reflecting a cautious approach to hiring in a remote working environment. While Top 11-25 and 51-100 firms reported modest increases in overall headcount at 1% and 5% respectively, Top 10 and 26-50 firms reduced their headcount by 1% and 4% respectively.

Law firms are beginning to adapt their working practices and challenges continue around workforce planning; therefore, a circumspect approach to increasing headcount over the last year is understandable. Key influences on future headcount change will include access to a more geographically disparate talent pool as part of a hybrid working model, how office space will be used moving forward, and the continued progression in the use of technology to automate processes.

As COVID-19 forces all entities to reassess their working practices and with a blend of remote working here to stay, law firms need to be consistently mindful of ensuring D&I initiatives are considered in how they operate going forward. Evolving and adapting D&I strategies to cope with a post-pandemic world will enable firms to continue to make progress.

Financing

In last year’s survey, all bandings on average and the majority of law firms who responded to our survey reported improvements in year end lock up on the back of a cash drive following the onset of COVID-19 and related government measures. That drive appears to have continued, as the FY21 year end lock up has fallen again in Top 10, 11-25 and 26-50 firms by between 5 and 10 days across those bandings. Even though Top 51-100 firms experienced a 1 day rise to 120 days, this number is still significantly lower than the 133 days reported in 2019.

Following an increase in external funding last year, which was as a result of many firms drawing down on funding facilities as an immediate response to COVID-19, Top 50 firms have considerably reduced their reliance on external borrowing. The reasons for this are twofold: the pessimism at the on-set of COVID-19 was not realised with many firms outperforming expectations from March/April 2020; and positive debtor lock up performance has provided an alternative boost to liquidity.

The future of the office

The COVID-19 pandemic has caused many organisations, and in particular professional service entities, to think about the future use of their offices. While virtual working has not been a choice during necessary lockdown periods, many organisations, and the individuals concerned, have seen benefits from home working and are planning to retain it to a degree.

All firms that participated in our survey intend to retain a degree of virtual working once all COVID-19 restrictions are lifted. In the Top 10, 67% of firm's expect 21-40% virtual working, with the remaining 33% being at 41-60%. This pattern is reversed for firms outside the Top 10, with 41-60% being the most common level of expected virtual working. There are a small number of firms outside the Top 10 (9%) that expect staff to work virtually over 60% of the time.

As a consequence of the move to virtual working, many firms are expecting to reduce their office footprints in the future. Notably, 100% of Top 10 firm's intend to reduce their footprint and this compares to between 39% and 44% across the Top 11-100 bandings. Among Top 50 firms who expect to reduce their office footprint, the most common extent of reduction is expected to be between 11% and 20%.