The facts behind the figures: Global Law Firms’ financial performance

13 November 2017

 

Our 2017 Law Firms’ Survey should give pause for thought to firms across the globe – for many, some significant changes are needed if they are to continue to thrive in the years to come.

Global law firms headquartered in the UK have benefitted from sterling weakening across a number of currencies following the Brexit vote in June 2016.  While on a global basis, modest fee income and profit growth has been achieved (for example, Global Top 10 firms headquartered in the UK increased revenue and profits by 8.1% and 9.8% respectively), it is movement in foreign exchange (FX) rates that has had the most significant impact on growth. To put some context around this, for Top 10 firms, the FX benefit contributed almost two-thirds of the overall top line growth and almost half of the bottom line impact – or put another way, an additional profit of £33k per partner.

Having taken this one-off FX benefit in the year to April 2017, it will be interesting to see the real commercial impact of Brexit on law firms start to play out in this financial year.  Undoubtedly some firms will enjoy a boost to revenue from providing regulatory advice to clients – but economic uncertainty means workflow is unpredictable, and there is also a cost of scenario planning to ensure firms remain fit for purpose for a post-Brexit environment.

And what of firms’ activities outside the UK?  This year’s survey shows an improved underlying performance by international offices, although for the majority of UK headquartered firms, international operations remain dilutive of UK profit margins.  Whilst Top 10 firms averaged returns of 37% from their UK operations, only Western Europe and Australia have come close to that performance with average net profit margin of 33%.  Elsewhere, profit levels remain challenging – averaging only 10% in the Middle East for example, with Africa still loss-making at -1%.   

This raises a number of management challenges. It may be that a strategy of globalisation is essential to capture the high growth opportunities that exist in emerging markets – and also in the world’s biggest market for legal services, the United States (still the most sought after destination for merger partners per our survey).

But for those firms operating on a global profit share basis, is the current generation of partners prepared to see today’s profits cut for investment in the future? Increasingly firms are adopting differential reward structures, such as capped lockstep ladders in lower profitability territories, to make the model work.

Watch this video where I give a quick 60 second update on the challenges ahead for law firms.

 

 

Our survey examines all of the factors that are driving the rapidly changing global landscape for law firms and looks at what the successful law firm of the future will look like. It’s well worth a read.

Kate Wolstenholme |  UK Business Services Leader
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