“Muted growth” for the legal sector despite increased law firm revenues

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Despite the majority of UK law firms experiencing a rise in revenue this year, a new 2023 benchmarking report from national audit, tax, advisory and risk firm Crowe found that this failed to turn into higher profits amid continued rising costs over the past year.

Although growth had reportedly slowed in comparison to previous years, two-thirds of the report’s participants performed well and claimed their revenue results “were as expected or exceeded their expectations”. In London, 67% of law firms’ revenues grew by up to 10%, while 38% of regional firms experienced revenue growth of more than 10% and another 38% saw growth of up to 10%. According to Crowe’s report just under 60% of regional firms reported results that “exceeded” their expectations.

While fee income increased for most firms, profit pools were hit by increased headcounts and higher base line expenses, which have increased to at least pre-pandemic levels. Of the firms participating in the report, it was found that there was a 50/50 split between those that experienced an increase in their profit pool and those that didn’t. Inflation levels and salary costs are some of the challenges law firms will face as they endeavour to curb expenses and increase profit pools. In this vein, profit per equity partner fell for most law firms – down 21% (to £513,660) in London and 10% (to £283,047) in the regions.

The legal sector’s growth was described as “muted” by Nicky Owen, head of professional practices at Crowe, particularly for City firms.

Meanwhile, 77% of participants involved in the report cited improving their lock-up as a key part of their plans over the next 12 to 18 months, with the previous year’s results considered a “worrying trend” for City firms. According to the report, this year regional firms were successful in reducing their lock-up by seven days, while City firms saw theirs increase by four days. ‘Lock-up days’ refer to the number of days it takes a business to convert its “debtors, stock and work in progress into cash”. Looking ahead, Owen explains that “firms will want to ensure money is coming into the business promptly to sustain their growth projections, particularly if costs continue to soar”.

He warned: “If inflationary pressures and the battle for talent continue to intensify, the year ahead could see firms passing on the cost to clients through fee increases.”

The report also provided insights into law firms’ investment in people, sustainability programmes and working practices over the past year and what this might look like going forward.