UK firms are facing increasing competition from their US counterparts and will need to adapt to manage rising staff costs and increasing client expectations, accountancy firm PwC has warned.

In its 2017 Law Firms’ Survey published today, the big four firm highlights pressure to attract and retain top fee earner talent, with many US staff paying newly qualified fee earners over £100,000 – far higher than many traditional UK firms.

The report, which surveyed 70% of the UK Top 50 and 55% of the Top 100 law firms, found that staff cost as a percentage of fee income grew from 36.7% to 38.5% last year. Profit per equity partner has remained largely flat and firms are generally seeing a reduction in profit, the report notes. Almost half of all firms experienced a fall in profits. Average profit margin in top 10 firms fell for the third consecutive year to 36.9% and is now lower than in 2012.

’Factors including staff cost inflation, the need to remunerate partners and staff commensurately with US rivals to retain the best talent, and the imperative to invest in technology and IT security, all demand funds,’ the report states.

As well competition from US firms, PwC also noted that the economic landscape remains ‘difficult as a result of ongoing economic uncertainty’, including from the vote to leave the EU.

Elsewhere, the report calls on firms to embrace new technology rather than stick with the ‘commonplace’. Although 70% of respondents are investing in client collaboration tools and around 40% are offering mobile apps and automated document production many firms are not taking technology further, the report states.

Referencing a ‘number of high profile’ incidents where organisations have been victims of ransomware attacks, the report calls for law firms to implement robust ‘business continuity plans’ to protect against attacks. It notes that 16% of firms surveyed had no framework in place while 25% failed to test their systems annually.

David Snell, partner and leader of PwC’s law firms’ advisory group, said: ‘Technology will impact all areas, from client service delivery to business support and, importantly, staff recruitment and retention. At the moment, the focus seems to be on updating or replacing old systems. Firms need to be more agile in embracing emerging technologies such as AI which will ultimately help them achieve more effective staffing levels and react faster to changing client demands.’

He added: ‘Embracing technology, building an agile and diverse workforce, and determining the right global strategy will be the key differentiators for firms seeking to remain competitive and relevant in the rapidly changing landscape of the UK legal sector.’