With revenues of £18.6bn, the accounts of the top 50 law firms for the 2018/2019 year show they continued to make hay in the sunshine of a strong global economy and buoyant client demand. It is less clear, however, whether they have put themselves in a strong enough position to weather the impact of COVID-19 and other challenges on their businesses.
Fee income for the top 50 law firms rose 7.3%, against a rise of 8% the previous year. This makes it one of the strongest growth sectors in the UK economy. These increases in revenue have broadly fed through into increases in profit, with operating profit rising 7.2% from 8.1% the previous year. However, it has not yet translated into improvements in productivity, with law firms’ cost bases generally increasing in line with their revenue.
This resilient overall picture on revenue growth masks some significant disparities among individual firms. The accounts show a real gap in fee income, with the large firms getting larger and a number of mid-tier firms finding growth harder to come by.
This disparity may be partly explained by the different specialisms of individual firms. There will be those whose models are more countercyclical, for example, such as restructuring or litigation. The fortunes of those focused on general corporate work or private clients will be more supported by the economic cycle, but this is not the full story. The accounts show real pressure points for certain types of law firms and some are struggling to differentiate themselves in an increasingly competitive marketplace.
This may be fine when the overall market is increasing in size. However, as Warren Buffet once pointed out, it is only when the tide goes out that it is clear who is swimming naked. We may be about to see who has forgotten their bathing suit as a toxic combination of a General Election, the UK’s departure from the EU and now COVID-19 dents revenues across some of the major law firms.
We believe this may be the last strong trading period for law firms for some time. We have already seen weakness in a number of key areas, such as real estate transactions, start to bite from autumn 2019. The legal business tends to be a geared play on economic growth, but the same effect operates in reverse at times of recession.
It will be important for law firms to be clear on why clients come and use their services. Have they done enough in terms of talent development, brand awareness or technology investment to remain competitive at a time when the fear is the overall market might now start to be shrinking? Those that haven’t made hay while the sun has shone may find themselves in a tough position.
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.