Fewer law firms in top 100 reporting revenue growth compared to 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 per cent 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, said: “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 per cent and 3.2 per cent 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.

Mr Snell added: “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.”