City firms are struggling to convert revenue growth into increased profits, unlike their regional colleagues, according to the latest edition of an accountancy firm’s annual study of the sector.

Crowe Clark Whitehill’s Law Firm Benchmarking Survey shows that 85% of firms grew revenue, compared with 76% in 2014. But over a quarter of firms experienced a decrease in the overall profit pool.

Over three-quarters (86%) of City firms showed a revenue increase in 2015 compared with 64% in 2014. However, profit-per-equity partner fell from £484,000 in 2014 to £480,000 in 2015.

The percentage of regional firms that showed a revenue increase, on the other hand, dipped slightly – 86% in 2014 compared with 83% in 2015. But PEP rose from £199,000 in 2014 to £221,000 in 2015. 

A 2.7% increase in total partner headcount could explain the fall in PEP for City firms, compared with regional firms where partner headcount rose by 0.7%.

City firms were also warned ‘not to take their eye off the ball’ after figures showed the average number of debt lock-up days rose from 110 in 2014 to 115 in 2015; work-in-progress days stayed the same, at 42 days. Regional firms cut their debt lock-up days down to 63 this year, from 67 in 2014; but the number of work-in-progress days rose from 63 in 2014 to 66 in 2015.

The report suggests that conversion to an alternative business structure (ABS) is not a key strategic step for most firms. Although 16% of firms had an ABS licence, nearly 85% of the remainder had no plans to become an ABS in the next two years.

Nearly two-thirds said a merger or acquisition was unlikely in the next 12 months, but a further breakdown of figures shows changing attitudes.

Last year 27% of City firms said it was likely they would consider a merger in the next 12 months compared with 11% who said the same thing this year. But outside the City, 30% of regional firms said they were likely to consider a merger in the next 12 months, compared with 18% last year who said they would consider it.

City and regional firms differed on what they considered to be the biggest challenge to their firms’ future success.

Half of City firms regarded price competition as their biggest challenge.

‘New market entrants with highly leveraged business models, the continued evolution of automated workflows and a general increase in the price-awareness of clients has all added to the pressure to deliver high-quality service at a lower cost, the report states.

Regional firms were most (48%) concerned with the availability of affordable, high-quality staff.

‘With the upturn in economic outlook, there has been a race to recruit good people to create capacity,’ the report states. ‘Firms must now look at innovative ways to retain their key players, especially their young, rising stars.’

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