Our analysis of the top 50 law firms’ filed accounts for the 2017/18 year shows the legal market in robust health in terms of revenues. Turnover rose on average 8%, well ahead of inflation, reflecting buoyant conditions. At the same time, operating margins increased to 31.3% from 30.9% last year, suggesting firms are turning pounds of revenue into profit more efficiently.
This reverses the trend of the preceding three years, where operating margins have steadily been declining. This is an important step at a time when the war for talent is so intensive. It was recently reported that Freshfields Bruckhaus Deringer would pay its newly qualified lawyers £100,000 in salary. Clifford Chance followed shortly afterwards and this will put pressure on firms with aspiring lawyers they wish to retain. At these levels, firms need to ensure they are getting the return from every member of staff.
Are they achieving efficiency?
For the time being, it still seems to be longer hours rather than efficiency gains through, say, technology, that are making the difference. Technology investment is broadly incremental and while this will be improving efficiency we have not yet seen significant leaps in service delivery from new technology that will really drive enhanced efficiency.
This is perhaps surprising as investment in technology should in theory reduce the reliance on people to deliver the service, at a time when people are increasingly an expensive commodity. If nothing else, technology should lead to greater automation of manual administrative tasks, allowing staff to focus on the more interesting and rewarding parts of their role, thereby helping with retention.
No time for complacency
It is worth noting that even though law firms are growing, there are elements of fragility, notably because of high levels of lock-up. Although revenue growth was on average up 8% on last year, client debtors are also up 13% and average debtor days stands at 121 days. This does not bode well should the environment turn.
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By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.