The top 50 law firms increasing their revenue to over £20bn during the first financial year of the pandemic has been branded an “astonishing achievement”.
Giles Murphy, head of professional services strategy at Evelyn Partners, formerly Smith & Williamson, said the only blot on the landscape was that salary costs “surprisingly grew” at an above-inflation rate of 4.8%, despite overall headcount falling slightly and few external pressures. as lawyers were not moving during Covid.
Commenting on Evelyn’s analysis of the top 50 law firms’ accounts for the financial year 2020-21, he said: “For the legal sector, many of the pressing issues from before the pandemic are still there: retention of talent, strategic direction, brand awareness and differentiation, succession planning and long-term funding, for example.
“Costs are coming back – including business development and travel which is putting renewed pressure on margins.
“Perhaps more importantly, salary rises are back with a vengeance. The competitive spiral on lawyer salaries has resumed at a time when wage inflation is already high.
“If law firms are unable to pass these costs onto clients, which seems more challenging in a weakening economic environment, they face declining profitability.”
There was another, “more philosophical”, question about lawyer pay, Mr Murphy said. “Firms continue to focus on salary as a tool to attract the next generation of lawyers. However, there is a real question over whether this still attracts the best and brightest.
“Millennials have different workplace priorities, caring deeply about the ‘purpose’ of their firm, alongside elements such as diversity, inclusion and environmental impact.
“As such, offering more and more money may get people through the door, but it may not build the loyalty and commitment that law firms want… Those associates that are lured by the highest possible salary can always be drawn away by a higher offer.”
Hogan Lovells and Ashurst recorded the biggest increase in operating profits among the top 10 firms – at 33% – but others in the top 50 did even better, such as TLT (56%) and RPC (52%).
Freshfields Bruckhaus Deringer was the only one in the top 10 to experience a decrease, by 10%, while Herbert Smith Freehills saw a rise of 31% and Eversheds Sutherland 27%.
Turning to fee income, Ashurst again led the way with a 10% jump, with DLA Piper performing worst in the top 10 with a decrease of 1%.
Hogan Lovells came second with 8%, followed by Freshfields and Eversheds with 6%. Across the whole top 50, RPC (22%) and Travers Smith (19%) led the way.
Mr Murphy said law firms could “take credit for swift and prudent action to strengthen their positions” during the pandemic, building up strong cash reserves over the year to £3bn.
“But just as law firms put the pandemic behind them, they face a new series of challenges. The economic environment is a significant cause for concern. The UK is currently experiencing an inflation shock not seen since the 1970s.
“This is creating a tough environment for companies, who are seeing input costs rising. This is already being seen in corporate confidence and, by extension, corporate investment.”
He said that, while law firms have worked hard to shore up their cash balances, debtor days were still too high: “It is hard to think of another industry that allows clients over three months to pay for its services.
“The dramatic reduction in debtor days early in the pandemic shows that significant success is possible, but management teams need to keep this under constant focus.”