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UK law firms score strongest growth since 2011 - 2019 Law Firms Survey

Oct 21, 2019

  • 2019 saw the highest proportion of firms growing UK fee income since 2011 - 89% of Top 100
  • However, the pace of growth has slowed from an average of 8.3% in 2018 to 5.9% in 2019
  • Average profit per full equity partner (PEP) has reached record highs across the Top 100
  • Growing appetite for deal activity with some mid-tier firms focussing on IPOs and Private Equity (PE) funding
  • More mid-tier firms reporting Brexit as the key challenge to their financial performance aspirations, whilst Top 10 are focused on technological change
  • Optimism persists in the medium term, with Top 50 firms expecting profit growth to exceed fee income increases in 2020/2021

Despite a raft of challenges from Brexit to global economic pressures, the number of UK law firms achieving UK fee income growth is at its highest since 2011: 89% of Top 100 firms saw growth compared to 84% last year with only a third reporting growth in 2011, according to PwC’s latest Law Firms’ Survey.

While this may be cause to celebrate, the Survey data also reveals that actual growth rates are decelerating - the average 2019 figure has dropped by 2.4% from the previous year’s 8.3% - with no Top 10 firm reporting double digit growth compared to 50% in 2018. 

And as the deadline for Brexit gets closer, more firms are seeing this as a key challenge to their financial performance aspirations - while no Top 25 firm reported this as their key challenge in 2018, 20% of Top 10 and 63% of Top 11-25 firms have done so in 2019.

According to Kate Wolstenholme, Leader of PwC’s Law Firms Advisory Group and editor of the Law Firms’ Survey, profit pressures continue to challenge the legal sector (only the Top 26-50 firms have bucked the trend, with a marginal improvement of 0.5% to 24.7%).  For Top 10 firms, profit margins have fallen for a fifth consecutive year to a low of 35.5% in 2019 (40.0% in 2014). 

“With 31 October looming large, Brexit and economic uncertainty remains a significant concern, with most firms expecting only modest fee income growth in the short term with profit improvement lagging. 

“Our survey does show, however, that UK firms’ optimism for a brighter future hasn’t diminished, with the Top 50 expecting profit growth to exceed fee income increases during 2020/21. 

“Firms in the Top 25 are battling an ongoing erosion in margin, but this is in part due to strategic investment as opposed to increasing staff costs which have hit margin in recent years. Although this is undoubtedly a drag at the moment, investing in system updates and innovation will enable firms to grow a more sustainable business in the long term and build market share.”

During the last year, average PEP increased, reaching record highs across all bandings. Outside of the Top 10 a significant contributor to this growth has again been equity management. 

The report also reveals a widening gap in performance between UK and US top tier firms, with UK global top tier margin at 36.4% compared to a US top tier equivalent of 45.7% - this equates to an average of £152m of profit or £317k of PEP. 

Future dealings

The 2019 Survey reflects a growing appetite for deal activity across the UK legal sector, with 57% of Top 10 firms and 36% in the Top 11-25 stating that mergers are somewhat likely within the next two years (2018: 40% and 27% respectively).  For those operating at the top end in terms of market share, the focus will be on diversifying their operations, geographically and along service lines, potentially through deal/merger opportunities with international players in order to further exploit more profitable international markets, especially the US.

In the mid-tier, efforts to gain scale, new service capabilities and a broader geographic focus are more likely to be achieved by consolidating with a smaller or similar-sized firm, securing a stronger platform both for future investment and attracting talent. IPO or private equity investment are also becoming more appealing as a means of realising value as well as gaining access to growth funding and attracting and incentivising talent. Private equity firms are, in particular, attracted by firms with disruptor status using alternative delivery models, which offer the promise of cash generation, high scalability and opportunities for future growth.

War for Talent

Despite falling utilisation and increasing spare capacity being a significant issue for several years, a number of firms have increased headcount in the current year, particularly across junior fee earner grades. Other findings include:

  • At trainee level, firms are continuing to recruit more females than males, although female equity partner numbers have remained broadly static with no firms exceeding 20% in volume.
  • BAME representation at partner level in Top 10 is flat at 7%, while the trainee grade has grown from 19% to 22%
  • 83% of Top 10 firms have a strategy in place to address gender and BAME imbalances across the business compared to 91% and 82% respectively amongst Top 11-25 firms.  More than half of Top 50 firms are also focusing on disability, social mobility, and sexual orientation.
  • Staff turnover continues to be higher than expected across fee earner grades compared to other professional service sectors, with the exception of newly qualified staff and trainees.

Leon Hutchison, co-editor of PwC’s Law Firms' Survey, commented:

“There are a number of challenges facing UK law firms. The most pressing perhaps include finding the right markets for investment, ensuring growth is sustainable and profitable to protect margin, and building a culture that is relevant and attractive to today’s workforce.  Alongside this, firms are also having to make the right choices for technology investment to capitalise on opportunities whilst managing the increasing risks of a technologically enabled world.

“The firms that build their strategies around meeting and overcoming these challenges will likely become the winners as UK law firms continue to adapt to a new world.”



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