2016 Annual Law Firms' Survey from PwC
David Snell, head of our Law Firms advisory group, and Kate Wolstenholme, our UK Business Services leader, take a look the findings of our 25th anniversary survey report which is set against a backdrop of significant uncertainty in both the UK and the global economy, particularly following the EU referendum. As well as the current year's results, this anniversary edition considers the results from previous years and, in our new 'Firm of the future' section, looks at the challenges law firms are likely to face in the future.
Law firms see ‘modest’ revenue growth alongside margin pressure ahead of more challenging market conditions
· 75% of Top 100 UK law firms report revenue growth, down from 82% in 2015
· Profit margins fall across the Top 100 as pricing remains under pressure, productivity decreases and salaries increase
· Profit per equity partner in UK remains largely flat through tight control of partner headcount
Following last year’s record number of firms reporting revenue growth, market challenges have caused growth to slow across the Top 100 firms in 2016, according to PwC’s 25th annual Law Firms Survey. 75% of the top 100 UK law firms reported revenue growth this year, and while this is positive, it is down from 82% in 2015.
Overall financial performance in the sector has been flat due to increased headcount and salary costs against a drop in chargeable hours and hourly rates. The top 50 firms have increased fee earner headcount by 7.6% on average and return on this investment is yet to yield significant revenue growth. Against this backdrop, consolidation through lateral hiring programmes and firm mergers is again on the rise.
David Snell, partner and leader of PwC’s Law Firms Advisory Group, commented: “As confidence returned to the sector last year, firms increased headcount in anticipation of continued improving market conditions. However, with the market turning out to be more challenging than expected and with increased competition from US firms and new entrants, spare capacity is now an issue for firms.
“This situation is likely to be exacerbated following the EU Referendum vote in favour of Brexit. Profit per equity partner and rate per hour are under pressure in a sector where supply outweighs demand.”
The 2016 Law Firms Survey identifies that UK law firms have been particularly successful in expanding on an international scale to meet client need. The challenge for UK top tier firms to match US performance in terms of fee income and profit growth continues. While this growth has been flat for the UK, rates of 2.9% and 3.2% respectively, have been reported for US counterparts. The report also concludes that while international performance may look to have improved this year, the increases are largely attributable to foreign exchange fluctuations.
David Snell continued: “Despite partner numbers being tightly controlled, spare capacity has increased and is a cause for concern, particularly with the increased uncertainty around Brexit. Workforce management and deployment has remained unchanged for many years and we expect the better performing firms in the future will be those who can improve the agility of their workforce both between practice areas and globally.
“One issue law firms can’t ignore is the need to invest heavily in technology, both to replace old systems and invest in emerging technologies such as Artificial Intelligence (AI). The successful firms of the future are likely to provide global services supported by virtual collaboration and widespread use of AI. The adoption of new technologies, however, will make it imperative for firms to redefine roles of the existing workforce to avoid further spare capacity.
“The UK legal sector has shown its resourcefulness and ability to adapt over the 25 years of our survey. Despite the many challenges we see this year and ahead, the sector is in good shape with many successful firms with the resources to meet future uncertainties.
“However, increased competition, changing client demands and rapidly evolving technology will all require attention and financial resources. Firms will need to continue to innovate, remain agile and find new ways to finance what will be a period requiring significant financial investment.”