Posted by Robert Banner, a council member of Legal Futures Associate ILFM [1]
Banner: Firms need strong financial leadership
I am delighted to be involved writing about the ILFM’s collaboration with Crowe and its annual UK law firm financial benchmarking report.
Before I consider it in detail, I would like to highlight the practical importance of surveys of this nature.
Prior to my recent retirement, I was involved in law firm management for over 35 years, during which, for many years, benchmarking surveys did not exist.
This meant that, as a manager, you had difficulty in assessing how successful your firm was in comparison with its competitors. All you could do at that time was to try and prise out of counterparts how successfully or otherwise their firms were performing.
They were, though, hardly likely to admit that their firm was struggling.
With the advent of benchmarking reports such as Crowe’s, matters changed considerably. To know on a confidential basis how all areas of your firm compare with its competitors was so valuable. In particular, to be able to isolate areas which were not doing well, to improve them and increase your firm’s performance and profitability became a huge bonus.
My advice to all law firm managers is to take part in benchmarking annual surveys to ensure that all areas of your law firm are operating as successfully as possible.
Mind the profitability gap – how legal finance teams can close the growing divide
The Crowe report [2] has revealed several important trends shaping the financial performance of UK law firms.
In this three-part blog series, I will explore the key findings in more depth, beginning with a closer look at the widening profitability gap between regional and City firms.
At first glance, both groups appear to be performing well: fees per partner are up across the board, and revenues have increased by an average of 11%. But beneath these top-line numbers lies a very different reality for legal finance teams.
City firms have seen partner profit pools grow by 12%, while regional firms have experienced an 11% decline. This difference cannot be explained by fee income alone and highlights a significant issue at the centre of law firm operations – the strength of financial management.
Revenue growth is not translating into profit for regional firms
Regional firms reported the largest revenue growth this year (12%), outpacing their City counterparts. Yet many are not converting that growth into profitability.
Inflationary pressures, salary expectations, recruitment costs and rising overheads are eroding margins faster than revenue can compensate. At the same time, investment in infrastructure and technology continues to increase, placing further strain on budgets.
For those working in legal finance, this trend is not surprising. When growth is driven by volume rather than margin, the financial systems beneath the surface matter more. Without disciplined cost control, accurate forecasting and consistent financial oversight, profit erosion becomes inevitable.
City firms are succeeding through operational discipline
The data suggests that City firms have gained their advantage because they have strengthened the fundamentals underpinning their systems.
This includes:
- Rigorous budgeting and scenario planning;
- Streamlined operational processes;
- Closer management of lock-up and cashflow;
- Tighter control over expenditure and partner drawings; and
- Investment in technology that directly supports financial efficiency
These are areas where legal finance teams play a key role, often driving the behaviours and processes that determine whether a firm can absorb inflationary strain or risks being overtaken by it.
Financial insight now plays a strategic role
The widening profitability gap reinforces a longstanding message to the sector: law firms cannot rely on fee growth alone. They need strong financial leadership from within, not just to stay compliant, but also to stay competitive.
Legal finance and compliance professionals are increasingly at the centre of strategic decision-making. Whether advising on sustainable recruitment, modelling the long-term impact of salary increases, or identifying pressure points in cash flow, their insights influence the resilience of the entire business.
This is particularly true for regional firms, where margins are thinner and the impact of poor financial control may be felt more quickly.
Looking ahead
I think there is one factor which will affect the future of the legal profession which arises directly out of the report and another, just as important, which arises out of new trends which are beginning to affect law firm owners’ profitability.
Firstly, the profitability divide I have described is not necessarily a permanent one.
Regional firms that invest in financial capability, operational discipline and well-supported accounts and compliance teams can reverse the trend.
The ILFM believes that the firms which will thrive in the coming years will be those that recognise that financial management is a strategic function that underpins every part of the business, and if done well, places them at a competitive advantage.
Secondly, a new trend has developed which is solely related to Gen Z, as they are called, and could affect all law firms. Until recently a young lawyer’s priority and expectation was to have a share of the ownership of a law firm as soon as possible. There is now a developing trend whereby that is no longer their priority.
Many prefer a well-paid employed position which doesn’t involve the investment and the pressures associated with ownership. This trend is beginning to increase current law firm owners’ profits, in some cases significantly, when retiring owners are not replaced by younger lawyers.
The downside is that, upon retirement, owners might find some difficulty in releasing their capital. Could this ultimately lead to increased external capital being introduced leading to an increase in external ownership. It will be interesting to see what happens.
Until his recent retirement, Robert Banner was involved in the management of law firm BannerJones Solicitors Ltd for over 35 years