Support for clients during the pandemic cut larger UK law firms’ billable hours by 15%, a report has found.
However, three-quarters maintained or increased profit per equity partner (PEP) during the past 18 months by imposing “rigorous cost controls”.
The research also found clients demanding greater financial transparency and pricing flexibility.
Tech firm BigHand based its report on 800 responses from finance executives and managing partners at law firms in the UK and US with 100 or more lawyers.
In providing an “unprecedented level of support for clients, many of whom were facing huge operational challenges” during the pandemic, firms saw billable hours fall by 15% in the UK, compared to only 6% in the US.
At the same time, billing write-offs escalated, with almost half of UK firms saying they had escalated by up to 60%.
In response, law firms imposed rigorous cost controls, with “significant permanent and temporary reductions in headcount, hours, and salaries”.
Among UK firms, 27% reduced headcount permanently and 21% temporarily, 27% cut working hours and 26% premises costs. Similar proportions cut staff pay and partner drawings.
Researchers said cost controls imposed over the past 18 months had played a “significant role” in maintaining PEP, which stayed the same or increased over the past 18 months at 75% of UK firms and 78% of US firms.
Meanwhile, global financial challenges encouraged clients to become “far more focused” on costs, with eight out of ten UK firms saying they had experienced rising client demands for financial transparency.
UK firms reported an increase of 26% in client demand for alternative fee arrangements (AFAs), in response to which 43% of them introduced them, including fixed or capped fees.
The report said 41% of UK firms had gone further by offering “discounted standard rates, flat discounts or early payment discounts – which will create new profitability challenges”.
The report found that 75% of US firms and 61% of UK firms had employed “dedicated pricing experts” over the past 18 months, while half of UK firms provided “greater visibility of the pricing breakdown” at the start of the matter.
“A significant cultural shift is afoot throughout the industry to increase the focus on profitability. Firms are making improvements to their matter pricing by ensuring the right people are in place, with the right training and remuneration.”
However, while “cultural change is beginning to occur across firms”, many still put the “burden of profitability” on partners, with 79% of UK firms saying they held partners accountable for how profitable work is to the firm, rising to 96% at firms with 1,000 or more lawyers.
Despite this, the survey found that only 23% of UK partners had access to billing information or profitability data.
“Responsibility for profits is also slowly extending from partners to associates but firms are still not providing the real-time information required to improve matter profitability and reduce budget overruns.
“Things are changing however and as the report shows, there is senior level commitment to investing in dedicated pricing solutions, with 86% of managing partners confirming investment is planned in technology over the next two years.”