Revenues at law firms increase but surging costs drag profits, says Crowe

Increased turnover failed to turn into higher profits for UK law firms because of rising costs in the past year – that’s the principal finding of the Law Firm Benchmarking Report produced by national audit, tax, advisory and risk firm Crowe.

The 2023 report has been produced in conjunction with the Institute of Legal Finance & Management (ILFM).

Ross Prince, Partner and Head of the Professional Practices team in Crowe’s Midlands office, said: “Demand for services remained high this year, but costs have soared due to the cost of living crisis increasing industry pay expectations and record levels of high inflation.

“Coupled with increases in people numbers, profit pools have been dented even though fee income has increased for most firms.”

Key findings include:

• Profit pools down despite fee income rises
  
• London firms struggle with lock-up: four-day increase on last year
  
• Less than a third have a well-established sustainability programme in place
  
• Half of firms saw revenue growth of up to 10 per cent
  
• Fees per fee earner: London - £285,850; Regional - £145,673
  
• PEP down 21 per cent in the London, down 10 per cent in the Regions
  
• Headcount up 6.8%; personnel costs rise 13.1 per cent
  
• 95 per cent identify cybercrime as a high priority concern

After a resurgent 2021 and 2022 saw law firm revenues surge alongside profit pool increases, this year financial metrics across the legal sector represent a mixed bag, according to the new data from Crowe.

Most firms are expecting a continuation of the expanding workforce trend, with 42 per cent of firms anticipating their partner numbers to increase and 70 per cent expecting their fee earner numbers to increase by up to 10 per cent.

Increased salary costs also look set to continue with 83 per cent of participants considering pay increases between 2.5 – 7.5 per cent. This is no surprise given the cost of living crisis with many firms providing increased salaries to support their staff.

More broadly, firms showed buoyant expectations for the year ahead, with confidence remaining high (77% of firms expect to see an improved financial performance) despite the ongoing talent war and in spite of 65% saying the UK economy will continue to be challenging, says Crowe.

In terms of threats, a vast majority (89 per cent) of participants believe there is a lack of cybersecurity awareness within their firm, with most only offering training on an annual basis – a surprising discovery given that 95 per cent of firms say they rank cybersecurity as a high priority concern.

Nicky Owen, Head of Professional Practices at Crowe, said: “After a strong 2022, the legal sector has seen more muted growth across most financial metrics this year, with London firms in particular battling to keep rising costs under control. If inflationary pressures and the battle for talent continue to intensify, the year ahead could see firms passing on the cost to clients through fee increases.

One worrying trend for London firms is that lock-up days have increased. Cash is king and firms will want to ensure money is coming into the business promptly to sustain their growth projections, particularly if costs continue to soar.”

Tim Kidd, Chief Executive of ILFM, said: “Having partnered again this year with Crowe to bring the findings of this important report to ILFM members and the wider legal profession, it is clear that the main driver for attracting and retaining talent within a law firm focuses on employee benefits together with a good salary.

“We are pleased to have gathered vital data from our legal finance members, who are the ones on the operation floor handling and protecting client ledgers.

“Their input on the benchmarking survey is invaluable for data on lock-up, cashflow and revenue, together with imparting their concerns with cybercrime, as 95 per cent admitted it’s a worry."