Law firm revenues increase but surging costs drag profits – report

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 (pictured), 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.”

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 new data from Crowe.

Regionally the growth figures were more pronounced, with more than a third (38 per cent) seeing growth of more than 10 per cent (and the same proportion seeing growth up to 10 per cent). This regional showing was surprisingly strong, with 58 per cent of regional firms recording results that exceeded their expectations.

Trends apparent in last year’s findings continued when it comes to headcount figures, with three quarters of firms (74 per cent) increasing their headcount, translating to a 6.8 per cent increase in headcount across all firms (even higher, at 8.4 per cent for the regions alone).

A 13.1 per cent rise in personnel costs was not surprising, in light of industry-wide pressure to increase salaries in the war for talent attraction and retention.

Reinforcing this salary trajectory trend, firms reported salary and benefits packages as the primary driver for attracting talent (71 per cent), with 50 per cent listing firm culture as a main driver and 40 per cent referencing flexible working as a consideration.

Sustainability continues to be an area of focus, but the majority of firms have more to do, as only a third report that they are operating well-established programmes. Almost half (45 per cent) do not yet have a structured programme or are in the process of developing one while, surprisingly, 11 per cent of respondents said they neither have a programme nor plan to implement one.

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.

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.