The vast majority of top-100 firms continue to increase their revenue and profit – but a disparity is emerging between the firms at either end and the ones in the middle. According to the latest legal sector annual report from Big Four firm PwC, net profit was up by an average of 14.2% among the top 10 against fee income growth of 8.1%.

Similarly, among the firms ranked from 51 to 100, net profit was 12.5% against fee income growth of 9.4%.

Net profit for firms between 11 and 50 was around 5.5% and grew at a slower rate than fee income.

Mark Anderson, professional and business services sector leader at PwC UK, said the UK legal sector remains 'remarkably resilient', despite a challenging macroeconomic environment.

'Economic uncertainty, geopolitical volatility and rising costs present an ongoing challenge for firms. However, resilience is not being achieved evenly and the performance gap between winners and losers is stark.

‘The largest firms are pulling ahead - using their scale, operational discipline and targeted investment to convert growth into profit, while some smaller firms are succeeding through specialism and agility. That leaves the "squeezed middle" finding it increasingly difficult to absorb cost pressures while achieving growth and ultimately placing them under pressure from both directions.’

The report emphasises that, while the sector as a whole continues to grow, the distance between the leaders and the rest is widening every year. The largest firms can harness the compounding advantages of scale, international reach and operational leverage, while mid–size firms confront mounting structural headwinds.

Market share among firms in the top 10 has increased by 6%, while this has dropped among firms in the rest of the top 100. Firms ranking between 11 and 50 have ‘effectively contracted’, the report states. 

At the same time, hourly rates have gone up faster in this ‘squeezed middle’. Average rates rose by 2.6% in the top 10 but by 5.5% in the 11-25 category and by 6.6% among firms ranked between 26 and 50. Rates increased by just 0.8% for firms in the rest of the top -100.

Firms are likely to be reinforcing their existing operation, with 67% of the top-100 firms targeting growth in selected sectors while 22% are pursuing geographic expansion.

Firms are also becoming more selective about inorganic growth, with appetite for lateral hiring and tactical acquisitions broadly unchanged and interest in transformational M&A falling significantly compared to a year ago.

A survey of firms in the top 100 found that 85% were concerned about cyber threats, although this has fallen by 4% percentage points in the last year. A similar proportion are concerned about the speed of technological changes, including AI, which had risen by 25 percentage points.