Annual Law Firms’ Survey 2020: Embracing change to succeed

Our annual summary of the financial results and trends from the past year #PwCLawSurvey

81%

of Top 100 firms are concerned COVID-19 will stop them meeting their financial ambitions
PEP

has fallen across all Top 10 bandings (by between 2-10%), the first occurrence of this in 8 years
Chargeable hours

Average chargeable hours fell in Top 10 and 25 firms for almost all grades of staff (by between 2-11%)

What we’ve seen this year

Going into this year, firms faced many challenges. They needed to ensure sustainable and profitable growth with Brexit looming over them, build a culture attractive to new talent, and invest in the right technologies to build and maintain competitive advantage.

And then in March, the coronavirus (COVID-19) pandemic hit, disrupting plans as firms focused on keeping themselves going. Unsurprisingly, this year’s survey revealed COVID-19 is the most significant threat to law firms meeting their future ambitions over the next 2-3 years.

We believe this offers a chance for firms to do things differently. The pandemic has provided an opportunity to fast track a change in working culture, with positive change expected in areas such as work/life balance, hybrid working, use of office space, diversity and inclusion, focus on mental health, and upskilling staff in digital technologies.

Those that build on the work initiated in their immediate response and embrace the possible innovations will emerge stronger, and position themselves as firms that can look to the future with confidence. That’s why this year’s theme is “embracing change to succeed”.

“From the end of March (UK lockdown), most law firms moved swiftly to put in place measures of flexibility and agile working which we see continuing beyond COVID-19. The pandemic has provided an opportunity to fast track a change in working culture, with positive change expected in areas such as work/life balance, hybrid working, use of office space, diversity and inclusion, focus on mental health and upskilling staff in digital technologies.”

Kate Wolstenholme Leader, Law Firms' Advisory, PwC UK

This year’s key themes

Global financial performance

Global financial performance has been impacted by COVID-19, with the lockdowns that began in China at the start of the year spreading to affect virtually every country. There are also other factors that will have impacted performance - the ongoing uncertainty surrounding Brexit and unrest in Hong Kong for example.

It’s understandable then that global financial performance has been mixed across the Top 10 and 11-25 firms this year, and is weaker than last year. Whilst modest fee income growth has been achieved, this is not consistently reflected in firms’ profitability.

All Top 10 firms delivered fee income growth, at an average of 3.6%, compared to 6.1% last year. However, average net profit (before full and fixed share equity partner remuneration) fell by 0.9%, compared with 2019’s growth of 6.5%.

UK financial performance

Whilst the financial performance of UK law firms has been impacted by COVID-19, further analysis underlines the fact that there was ongoing economic pressure in the legal sector prior to the pandemic. Our findings this year suggest that pressure on profitability exists more now than ever, with 42% of Top 100 firms reporting a fall in profits. This is up from 36% in 2019 and 30% in 2018.

Whilst 70% of Top 100 law firms reported fee income growth this year, this is notably down on prior years (from 89% in 2019 and 84% in 2018), and absolute growth levels have reduced.

The Top 10 trend of falling net profit margins continues into its sixth year and this year’s fall is significant, from 35.5% to 33.8% (this is 6.2 percentage points below the 40% high in 2014).

People

Diversity and Inclusion (“D&I”) initiatives continue to be a key part of the people agenda in law firms. There is evidence of positive change, although the pace is gradual rather than radical. With renewed emphasis on social justice and equality of opportunity within society, there’s a clear imperative for law firms to act.

There is a mix of headcount movements across the bandings. Top 10 and 26-50 have increased total headcount, whilst it has fallen in Top 11-25 and 51-100 firms. In terms of gender representation, there’s been a steady rise in female representation at partner level amongst the Top 50 firms (c. 19% to c. 21%). However, the continuing drop-off from trainee (>60% female) to partner is a reminder of the scale of the challenge.

Utilisation has fallen across almost all bandings and grades in the Top 50, with the largest reductions in the Top 25 firms. Consequently there is rising spare capacity, most notably at senior grades.

Financing

Most firms who provided data for this survey have a 30 April year end and so cash collection initiatives and financing decisions linked to COVID-19 have impacted our analysis. COVID-19 has taken working capital performance from a priority to an imperative for most firms. Even those who were well positioned pre-pandemic are closely assessing their end-to-end cycles and taking further steps to ensure a safe level of liquidity headroom to allow for any future shocks.

All Top 100 bandings improved their year end total lock up performance, with the Top 51-100 firms making the most substantial reductions (for the fourth consecutive year), from 133 to 119 days.

In response to COVID-19, many law firms have taken action around their external financing. The Top 50 bandings increased their external finance as a larger proportion of overall funding, with the most significant increases in the Top 11-25, up from 21% to 27% and Top 26-50, up from 12% to 17%.

Business Support, Governance and Risk

The top three board priorities for the next 2-3 years across the Top 100 firms are ‘Financial and operational performance’, ‘Refreshing the firm’s strategy’, and ‘D&I’. Financial and operational performance is of particular importance for firms outside the Top 10. Top 10 firms are most focused on D&I.

The top three priorities for business support over the next twelve months remain the same as last year: improving the use of technology; standardising and centralising processes; and improving legal service offerings. But the pandemic has significantly increased the priority of ‘Cost reduction’ in this year’s survey, mirroring a trend last seen in the year that followed the 2008 economic crisis.

This year's participants deemed cyber risk the second greatest threat to law firms meeting and/or exceeding their ambitions in the period from now until 2022, behind only COVID-19.

Explore the data

Below you can review the results of all our surveys from 2009 to 2020, and compare the performance of the Top 100 law firms over the last 11 years. Our explorer gives KPIs for law firms including fees per fee earner, profit margin, annual change in the size of Top 100 by fee income, and male vs female full equity partners.

To get our 2020 results with our full analysis, download this year’s report below.

Explore by selecting a date and range

KPIs

Fees per fee earner (£'000)

PEP (£'000)

Profit
margins (%)