Small to medium sized firms are optimistic about the future - even though profit margins are expected to shrink, according to a benchmarking survey published today.
NatWest's latest legal sector report looked at the financial health of 68 SME firms in England, Wales and Scotland with median annual fees of £5m.
On fee income, the survey found that median growth in 2022 was 8%. Seven in 10 firms expect fee income to grow by no more than 10% next year. More than half of firms expect to increase their charge-out rates by less than 10%. Most firms expect people costs to rise by at least 10%.
Nearly half of firms see recruitment and retention as the biggest challenge, followed by economic outlook, cashflow and inflation. A third of firms are likely to seek a merger or acquisition as a short-term strategy. One in five firms has been approached by a consolidator in the past year.
The most common working arrangement for employees was two days at home. Only 12% of firms plan to reduce office space in the next five years. ‘When discussing these matters with firms, what becomes clear is many are simply looking to reconfigure the space, moving towards meeting rather than working spaces and accepting they’ll be working with more spare capacity than they have in the past,’ the report says.
Despite the challenges highlighted in the report, 87% of respondents are optimistic about the future.
David Weaver, head of professional and business services at NatWest Group, said: 'It’s good to see that, despite various headwinds, law firms are optimistic about their financial performance in the coming year. This optimism reflects the fact that many firms have demonstrated record profitability in recent years, despite the ever-present challenges they face. Looking ahead, with firms predicting high people costs and overheads for 2023, it’s essential that firms keep a close eye on their margins.'
The report’s author, Andrew Allen, vice-chair of the Law Society’s leadership and management section, added: 'Despite the optimism, firms report they will need to work hard to keep profit margins on track. The popular talk at management level in law firms is currently turning more from recruitment to cash collection topics with the cost-of-living pressures in the economy presenting risks to lock up levels.'