Profits dented as City firms splurge to retain lawyers
Profits fell at half of the UK’s law firms last year as they were hit by rising staff costs resulting from a recent lawyer hiring spree at larger firms, it emerged today.
Profit margins tumbled despite about 70 per cent of legal practices in the country registering fee income growth over the last year. However, rises in revenue were relatively small - 3 per cent on average - and in many cases they were wiped out as large commercial firms were forced to increase salaries to retain and attract high quality lawyers.
According to a report from PwC, the “big four” accountancy practice, staff costs at the top ten British law firms grew by nearly 2 points to 38.5 per cent of fee income during 2016. The outlay on salaries had a bigger impact on the second level of City of London practices. Firms in the 11 to 25 bracket in terms of income saw staff costs rise from 40.6 per cent of fee income to 42.5 per cent.
Researchers pointed out that the rise in salary costs fell in line with a trend over the last three years and resulted in a reduction in profit of £200,000 on average per partner for the biggest firms.
Almost half of all firms in the UK experienced a fall in profits, the report concluded, with the average profit margin among the top ten City law firm falling for the third consecutive year to nearly 37 per cent. That figure is lower that it was in 2012.
The average profit margin for the second tier firms fell for the second year running, dropping from 29.2 per cent in 2015 to 27.7 per cent this year.
The researchers pointed out that senior equity partners at many City law firms had been able to maintain their annual drawings, which had been achieved in some cases by shedding partners.