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Cost pressures from high inflation and an inability to pass the burden on through pricing to clients are among the biggest concerns of the top 100 law firms in the UK, according to a survey, as billable hours fall across the board.
Staff and support function costs are growing at a faster rate than fee income, according to the annual PwC law firm survey, which polls the top firms by global revenue. The issue is one of the industry’s main concerns, along with macroeconomic volatility and cyber threats.
Law firms enjoyed a boon during the Covid-19 pandemic, with rising fees, a reduced cost base and a jump in deal activity. But mergers and acquisitions have slowed over the past year while inflation and the cost of living have risen. This has meant chargeable hours — which remain a primary way for lawyers to bill their clients — have stayed flat or fallen at most levels across law firms, from trainees to partners.
“Firms have achieved fee income growth but in the context of high inflation and reducing profit margins,” said Kate Wolstenholme, leader of PwC UK’s law firms advisory group that undertook the survey, published on Monday. “Going forward, firms will need to consider cost control in the context of more radical changes to their future operating model.”
Chargeable hours fell 8.3 per cent for full equity partners at the biggest firms by revenue. Equity partners are the most senior — and often the most expensive — lawyers who share in a firm’s profits.
Despite cost pressures, UK firms have had to keep pace with their US rivals, which have outposts in London and have been hiring aggressively. Rivalry from US peers was cited by the top 10 UK firms in the survey as their greatest competitive threat. That may have helped increase average headcount among the top 10 — from support staff to equity partners — by 1.8 per cent on the previous year. For firms in the 11-25 bracket, headcount grew 3.3 per cent.
Hiring new rainmakers to improve deal flow, and increasing commercial training for partners are among the measures being considered by firms as they try to power growth.
Clients keeping more work in-house was also seen as a challenge, according to the survey, which covered the period May 2022 to April 2023.
Despite the tough environment, no law firm said they were pursuing alternative funding or ownership structures in the next three to five years, and only a small number were considering minority investment from private capital investors. Law firms in the UK have been able to publicly list their shares for more than a decade, though very few have chosen to.
Artificial Intelligence is being discussed widely as a way to become more efficient, but the survey found “few to date have taken meaningful steps to capitalise on the opportunity”. Generative AI presents both an opportunity and a threat to the legal industry, with the speed of technology change seen as a risk to growth, the report said.
“The legal sector has had another strong year, but our survey highlights some challenges ahead, with bold steps needed to transform into a top-performing law firm of the future,” Wolstenholme said.