Legal sector returns to solid growth - PwC annual law firm survey

Published at 15:12 PM on 20 October 2014

  • 80% of law firms increased fee income with 70% achieving rises above inflation
  • Average profit per equity partner for Top 10 law firms exceeds £1million for first time since 2008, up 4% on 2013
  • Pricing pressures remain a concern

PwC’s 2014 Law Firm Survey has found that stability and confidence is returning to the legal sector. The number of UK law firms increasing fee income is higher than at any time since 2008, increasing at 80% of firms, compared with 63% last year. 70% of all firms increased their UK revenues above inflation (43% in 2013).

While significant merger activity has influenced this to a certain extent, law firms generally are experiencing a return to growth in the UK. Previous surveys have shown that law firms’ results were badly affected by a combination of the economic downturn and an over-supply of firms offering legal services. The 2014 survey shows that the legal sector has benefitted from the economy’s return to growth and consolidation in the market.

David Snell, partner and leader of PwC’s Law Firm Advisory Group, said:

“With clear evidence of improving economic conditions, our 2014 Law Firms Survey confirms that a degree of stability and confidence is returning to the legal sector. Corporate activity has re-ignited, with a corresponding uplift in transactional work, and firms are busy again.

“Notwithstanding this atmosphere of cautious optimism, the environment facing UK law firms remains fluid and challenging. Mergers and acquisitions, alternative business models, talent wars and data security threats are just some of the issues that this year’s survey brings to the fore.”

Other key findings from the survey include:

• Top 10 firms have recorded their highest ever average net profit margin at 40%, and the Top 11-25 firms have finally started to reverse the previous five year trend of margin deterioration, posting an increase from 26.0% to 28.2%.

  • Top 26-50 firms posted a fifth consecutive year of profit margin decline to 24.1% and now stand 0.2 percentage points below the average net profit margin for Top 51-100 firms.
  • All categories of firms have seen fee income per chargeable hour fall: by 8.1% for Top 10 firms, 2.8% for Top 11-25 firms and 9.3% for Top 26-50 firms. This, linked with increases in chargeable hours to near 2008 levels, suggests firms are busier, but pricing pressures remain acute.
  • Despite the increase in chargeable hours, there is a sizeable gap between actual hours recorded and target hours (by 9% on average in the Top 10 and 12% in the Top 11-25). This indicates that there is still spare capacity within firms, with our survey indicating the greatest gap between actual and target at partner and trainee level.
  • Top 10 firms’ gross profit margin per chargeable hour is 4.3 percentage points ahead of the mid-tier, while the difference among the Top 11-100 bandings is 3.1 percentage points.
  • Improving profitability appears to have been a key focus for a majority of firms: 58%, compared with 45% in 2013, of all firms recorded profit increases at a higher rate than the increase in fee income, and the number of firms reporting both fee income and profit reduction is just 7% this year (2013: 25%).
  • While the results in the 2014 survey reflect an improvement in revenues and profits for many firms, all financial KPIs are still short of 2008 inflation adjusted levels - in particular profit per full equity partner where the bandings are between 21% and 29% behind 2008.

UK profit per equity partner (PEP) has improved across all firms, with the Top 10 average exceeding the £1m barrier for the first time since 2008 – however, more than half of the year-on-year increase was driven by a 5% reduction in full equity partner headcount.

David Snell added:

“The survey paints a brighter picture for the future of law firms than a year ago. The majority of firms surveyed expressed confidence about their growth prospects over the coming three years, although uncertainty remains about growth prospects for the sector as a whole. Merger activity looks set to continue, and international expansion remains a priority for many.

“With challenges around the business model, changing client demands, and talent retention, law firms are operating in a very different market to that of five years ago. Recent law firm failures and enforced mergers are a reminder that the tide can turn very quickly.

“Change in the legal sector is set to continue, and firms looking for success and substantial growth will require clear leadership and vision, strong discipline over business practices, and agility to ensure they are able to take advantage of new and emerging opportunities.”


Hilary Downes
PwC | Manager - Communications
Office: +44 (0)20 7213 4706 | Mobile: +44 (0)7718 340 113
Email: [email protected]


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