The top 50 UK law firms have a combined turnover £18.6bn and for 2018/19 they continued to make hay in the sunshine of a strong global economy and buoyant client demand. Overall revenue from fees grew by 7.3% year on year (8% in the previous year). Our research carried out in September 2019 reveals the Top 20 Irish firms reported average growth between them of 8.2% in this period (9% the previous year).
|Irish Top 20||UK top 50|
|Average Revenue Growth 2018||9%||8%|
|Average Revenue Growth 2019||8.2%||7%|
|Average profit Growth 2018||8.8%||8%|
|Average profit Growth 2019||6.7%||7%1|
The increases in UK Top 50 revenue have broadly fed through into increases in profit, with operating profits increasing by 7.2% (8.1% the previous year). For Irish top 20 firms however translating revenue growth through to the profit line has been more challenging with Irish Top 20 firms reporting average profit growth of 6.7%. from 8.8% the previous year.
So, while the more buoyant Irish economy in 2018/19 delivered significant growth for the Top 20 Legal firms’ other factors have squeezed net margins. Are there lessons Irish firms can learn from their UK cousins?
Revenue growth, but are big law firms prepared for a crisis
Both UK and Irish firms have found it a real challenge to translate top line growth to improvements in profitability, with law firms’ cost bases generally increasing in line with their revenue in the UK and rising more significantly in Ireland primarily due to the scale of salary increases occurring in the Irish marketplace (pre Covid-19 changes).
While revenues and profits have continued to increase as demand for legal services expands, law firms have found it difficult to achieve similar growth levels in revenues and profits. Whilst there has been investment in technology in the top 20 Irish law firms it has been at a level well below the top 50 firms in the UK and salary increases have been well below those in the Irish marketplace.
UK law firms publish their accounts annually and Smith & Williamson carry out a review of these providing some detailed analysis for benchmarking purposes. Irish law firms do not publish their accounts annually (the exception being Mason Hayes & Curran). Our annual survey in Ireland gives us insight into certain aspects of performance among Irish law firms annually, the key points arising from our 2019/20 survey were:
- Wage increases significantly outstripping inflation: The Top 20 are geographically concentrated in Dublin. These firms have increased staff numbers significantly year on year in a market where there is significant wage inflation with more UK Firms establishing in Dublin looking to build a foothold in the Irish marketplace. In addition, in 2019 over 60 % of Top 20 firms reported salary increases of 6%+. (Overall 86% reported salary increases of 4%+). Our research into the UK Top 50 shows that staff costs are better contained with the average cost per employee, a proxy for wage cost, rising 2.8% compared to 4.1% in the prior year.
- Lateral hires driving up wage costs: Lateral hires have dominated the war for talent at the top end of the Irish market driving up partner salaries. It remains a key means to address growth objectives with over 50% of top 20 firms in Ireland saying hiring from other firms represents a significant opportunity. This strategy is double edged however, inflating staff costs and creating salary inflation risks on existing talent.
- Productivity is elusive: with scale comes the challenge of managing productivity and UK firms give us some salutary lessons. Competitive pressures on fees are playing a crucial role. Clients are making firms work harder to earn the same fees, while different pricing structures are emerging. Our research indicates the same issue in Irish Firms. For UK firms our analysis suggests also that the underlying value of output for each lawyer has remained static year on year.
- Lock-up is a continuing issue: For UK Firms debtor days still stand at 119 days, equivalent to £5.8bn at law firms’ year-end in unpaid invoices. Irish Top 20 firms are far more disciplined with Debtor days standing at 66 days, up from 60 days the previous year.
|Average Debtor Days 2018||61|
|Average Debtor Days 2019||66|
What’s behind the average?
We should be mindful that aggregate figures mask the strong position of some firms and the far weaker position of others. Firms with weak cash flow management, significant debtor days and work in progress and, perhaps without reserves, will find they are in a more precarious position as cash flow weakens through the pandemic recession.
Overall it seems the Irish firms went into the Covid 19 Pandemic in a strong position with a stronger grasp on working capital. There are however signals that salary inflation and property cost increases were outstripping revenue growth, particularly in the highly charged Dublin market. The Covid-19 pandemic has certainly brought a shuddering stop to these increases as many firms have taken action to reduce salary costs as revenues have been impacted. Perhaps the crises precipitated by Covid 19 is an opportunity to take a breath and look to ways of bringing more sustainable and strategic growth for Irish legal firms.
- UK numbers based on Smith & Williamson analysis of financial returns for Top 50 UK Law firms. https://smithandwilliamson.com/en/campaigns/top-50-uk-law-firms-accounts-analysis-2020/
Irish figures based on research carried out by Amárach on behalf of Smith & Williamson in Sept 2019 and published in the 2019/20 Survey of Irish Law Firms. https://smithandwilliamson.com/en-ie/campaign/8th-annual-survey-of-irish-law-firm-2019-20/
We have taken great care to ensure the accuracy of this publication. However, the publication is written in general terms and you are strongly recommended to seek specific advice before taking any action on the information it contains.
Smith & Williamson Freaney Limited Authorised to carry on investment business by the Institute of Chartered Accountants in Ireland. A member of Nexia International.