Soaring staff costs are outstripping increases in revenue and causing profits to nosedive, figures from two leading firms appear to show.

Annual accounts for international firms CMS and Trowers & Hamlins – both published in the past week – show that staff costs have risen at more than double the rate of increase in turnover.

The figures suggest that inflationary pressures and firms having to hike salaries to match the cost of living may be supressing profits.

At top-10 firm CMS, turnover was up 6.7% to £688m in the year to 30 April 2023, while staff and related costs rose 12.7% to almost £300m. Profit before tax and members’ remuneration and profit shares fell 6% to £225m.

The firm increased its headcount to 3,451 during the year and paid salaries totalling £250m. While staff costs increased overall, the highest remuneration for a member actually fell from £1.37m to £1.3m.

Cash reserves reduced during the year from £93.5m to £56.1m.

The group acted to simplify its structure and reduce operational and running costs from March 2023 by transferring staff previously employed by CMS Cameron McKenna Nabarro Olswang Services Ltd to be directly employed by the LLP.

The annual report added: ‘The results for the year and financial position at the end of the year are considered satisfactory by the members who expect continued profitable trading for the foreseeable future. Higher levels of inflation in the global economy have brought new financial challenge for the buyers of legal services.’

In its annual accounts for 2022/23, top 50 firm Trowers & Hamlins lauded an 8% increase in revenue to £136m, despite what it called a ‘challenging environment which supressed utilisation’. But expenditure rose by 17% due to an increased headcount and inflationary pressure, causing a fall in profit margin from 33% to 28%. Profit before tax fell by 9.5% to £38.3m.

The estimated entitlement of the highest paid member fell from £622,000 to £480,000.

Senior partner Sara Bailey said: ‘We expect the current challenging economic headwinds to continue which may delay an improvement to utilisation in some service lines. However, the group has a well-diversified practice and client case. We also anticipate increased demand in core areas such as litigation, projects & construction, employment, as well as from our international offices.’

According to a report by PwC last October, 44% of the top 100 law firms were set to report falling profits in part due to increasing cost pressures and high inflation. This was despite those same firms achieving an average of 8-10% fee income growth.

 

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