UK law firms: caught red-handed by staff cost inflation

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London law firms are taking the rap on all sides. Their business has long been under attack by — richer — US rivals interested in expanding in the UK. They have been forced to bump up staff pay and perks to stop them from jumping ship. Now, with work drying up, a survey by PwC — published on Tuesday — suggests this is an open and shut case: profit margins are taking a hit across the board. 

That lawyers should increasingly be twiddling their thumbs should not come as a surprise. The engine room of law firms runs at full throttle when there is an M&A transaction on the go. With deal volumes languishing at a 10-year low, billable hours are falling. 

That is less of a problem for bigger firms, which have a lot of clients. The top 10 law firms saw their billable hours in the UK fall by only 1.7 per cent. Smaller firms, with lumpier workloads, saw a fall of more than 7 per cent.

This sort of a slump is hard to offset by increasing hourly fees, although that has not stopped some of the groups from trying. The top 10 firms managed to increase the cost of chargeable hours in the UK by 12.3 per cent. That is quite an achievement given the next band, the top 11-25 firms, failed to get their clients to cough up any more money than last year. 

Overall, revenues fell slightly in real terms. Costs, meanwhile, rose more than inflation. Staffing increased as a percentage of revenues across the board — although big firms remain much more profitable than their smaller rivals. The Magic Circle may be suffering from US-based competition, but smaller firms have been affected too. Higher salaries appear to create a ripple effect all the way down the food chain. 

Investments in IT are also on the up across the space. Preventing cyber crime is an immediate concern. Another is exploring the potential of artificial intelligence. The hope is that this may — one day — reduce the punishing research workload of the junior lawyer, and help contain operating costs. On the current fee structure, it would also reduce hours worked and revenues. Expect another round of discussions about whether the chargeable hour is due for the chop.