What we’ve seen in 2023
The legal sector has had a strong year with firms achieving an average of 8-10% in fee income growth and firms remaining largely optimistic about future growth. We have also seen increased female representation at full equity partner level across all bandings and 100% of Top 10 firms now reporting that they have a dedicated Cyber Security Chief or equivalent.
However, the last year has continued to be turbulent. With ongoing macroeconomic volatility, increasing cost pressures and high inflation, it is clear that law firms continue to face challenges ahead.
This year, pricing remains a key focus area as cost pressures lead to a fall in profits. Firms also need to take more decisive action and bold steps to transform effectively, embracing innovative technologies such as GenAI and cloud, implementing new strategies to manage rising costs and taking greater action on areas such as cyber security and ESG.
Global financial performance
The challenging economy has not negatively impacted fee income for global law firms headquartered in the UK. However, profit growth has reduced this year as firms have struggled to pass increasing staff and supplier costs on to clients resulting in weaker profit performance.
UK and international offices have contributed relatively evenly to fee income growth but this has not been the case at profit level. International profit fell by £9.8m for Top 10 firms, while the UK office contributed £12.7m to global profit growth.
We are also seeing above-inflation cost increases affecting support areas such as IT, marketing and insurance. To reduce this, firms will need to consider costs as part of a wider transformation of their future operating models. Yet, fewer than 20% of Top 25 global firms cite “reducing cost” as a top three priority for business support over the next year.
UK financial performance
Despite a turbulent economy with the cost of living crisis and increasing inflation, all bandings apart from the Top 25-50 firms exceeded their predicted fee income growth.
However, firms have struggled to remain profitable this year as a result of increasing staff and client costs which have not been passed on to clients. Increases in headcount have been limited but staff costs have increased between 12% and 14%.
While chargeable hours are generally flat, the number of deals and transactions has declined over the last twelve months and so time may have been spent on less profitable work.
Firms will need to prioritise cost reduction in order to maximise profits over the coming year. This may require improving efficiency across the workforce, prioritising more profitable work or cutting out unnecessary costs across the business.
Technology
For the most part, law firms are recognising the opportunities that AI and emerging technology present, with 69% of Top 100 firms believing GenAI will have a positive impact on revenues. Despite this, 38% of Top 100 firms have not yet done anything with regards to this new technology.
71% of Top 100 firms viewed the speed of technological changes as a risk to growth in the medium term, representing an increase of 37 percentage points from 2022. It’s clear that there is an opportunity for firms to take action now, adopting new technologies as first movers to improve services and develop new client solutions.
To future-proof and build resilience, firms need to invest in data and technology before competitors do. Those that embrace GenAI and cloud now will capitalise on the benefits of this technology sooner, improving efficiency and gaining greater visibility of data.
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People
Despite an uncertain market, law firms have continued to grow total headcount over the past year, a trend that is also reflected among fee earners. This may change in the future as firms look to increase efficiency across the workforce and assess the long-term impact of technology and the effect of GenAI.
From a diversity perspective, we have seen increased female representation at full equity partner level across all bandings with Top 26-50 and 51-100 firms making the biggest strides in this area. Although encouraging, firms need to make greater progress to meet diversity and representation targets.
Firms will need to optimise their workforce in the next year, ensuring that skills gaps are met and that all bandings take bolder steps towards greater diversity.
Environmental, Social and Governance (ESG)
50% of Top 10 firms have successfully formulated and integrated an ESG policy while the remaining 50% have formulated but not yet enacted one.
ESG is also gaining traction as a growth segment for legal and advisory firms. 62% of Top 100 firms are considering, actively pursuing or have already established an ESG consulting service offering, demonstrating the value of ESG as a strategy for law firms. This value will only grow as the focus heightens on ESG and more firms embed policies in this area.
As regulations become more stringent and stakeholders increasingly want to see tangible progress in this area, firms need to be doing more to act on their ESG ambitions.
Explore the data
Below, you will find key results from our surveys from 2009 to 2023. Explore and compare how Top 100 law firms have performed over the last 15 years with a spotlight on KPIs including fees per partner, profit margin, annual change in size by fee income and male vs female full equity partners.
Download the Law Firms' Survey 2023 for a full analysis of last year's data.
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