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Cost pressures from high inflation and the inability to pass the burden on to clients through pricing are among the biggest concerns for the UK’s top 100 law firms as billable hours fall across the board, a survey has revealed.
Staff and support function costs are growing faster than fee income, according to an annual PwC law firm survey of the world’s highest-grossing law firms. This issue is one of the industry’s major concerns, along with macroeconomic fluctuations and cyber threats.
Law firms have benefited greatly during the Covid-19 pandemic, with rising fees, lower cost bases and a surge in deal activity. But M&A activity has slowed over the past year, and inflation and the cost of living have risen. This means billable hours at most levels of law firms from trainee to partner – which remains the main way lawyers bill their clients – have remained the same or fallen.
“Companies achieved fee income growth but against a backdrop of high inflation and falling margins,” said Kate Wolstenholme, leader of PwC’s UK law firm advisory group, which oversees the advisory group. The investigation was released Monday. “Going forward, companies will need to consider cost control in the context of more radical changes to future operating models.”
Billable hours for fully equity partners at the largest firms fell 8.3% in terms of revenue. Equity partners are the most senior (and often most expensive) attorneys who share in the firm’s profits.
Despite cost pressures, British companies have had to keep up with US rivals, which have outposts in London and have been recruiting aggressively. The top 10 UK companies in the survey cited competition from US peers as their biggest competitive threat. That likely helped push the top 10’s average headcount (from support staff to equity partners) up 1.8% from the previous year. For companies in the 11-25 age group, the number of employees increased by 3.3%.
Hiring new momentum makers to improve deal flow and increasing business training for partners are among the measures companies are considering as they try to drive growth.
The survey covers the period from May 2022 to April 2023, with clients keeping more work in-house also seen as a challenge.
Despite the challenging environment, no law firms said they would seek alternative financing or ownership structures over the next three to five years, with only a handful considering minority investments from private capital investors. UK law firms have been able to list publicly for more than a decade, although few have chosen to do so.
Artificial intelligence is being widely discussed as a way to improve efficiency, but the survey found that “to date, few have taken meaningful steps to exploit this opportunity.” According to the report, generative artificial intelligence represents both an opportunity and a threat to the legal industry, with the speed of technological change seen as a risk to growth.
Wolstenholm said: “The legal industry has had another strong year, but our survey highlights some of the challenges ahead and the bold steps required to transform into the top-performing law firms of the future.”
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