Profit margins are being squeezed at the top 100 firms by pricing pressures, pay rises and a decline in productivity, according to a respected annual bellwether published today.
PwC’s 25th annual Law Firms Survey also reports that 75% of the top 100 reported revenue growth this year, down on the 82% recorded in 2015.
Spare capacity is now an issue, the report states, after firms staffed up last year in anticipation of a continuing improvement in market conditions.
David Snell, partner and leader of PwC’s law firms advisory group, said: 'This situation is likely to be exacerbated following the EU referendum vote in favour of Brexit.
'Profit-per-equity partner and rate-per-hour are under pressure in a sector where supply outweighs demand.’
The report states that the Brexit vote has generated uncertainty around firms’ outlook on performance and headcount needs, with some firms deferring recruitment and/or pay reviews.
Firms also appear to be considering alternative approaches to headcount, with the top 25 recruiting increasing numbers of legal executives.
PwC identifies lock-up management as a key challenge in law firm financing, highlighting average year-end lock-up days of between 113 and 140 days. An average top-10 firm could, however, generate an additional £10.3m using a 110-day benchmark.
Lock-up management remains an 'Achilles heel’ for the sector, PwC says. 'Whilst many firms report being able to impose sanctions on partners and staff for poor performance, few effectively do so in practice.’
Predicting what the ‘firm of the future’ may look like, PwC says more transactional roles could be significantly affected by the use of robotic process automation, whereby digital robots replace routine and standard ‘human transactions’, operating around the clock.
New technology such as Blockchain could 'either enable or entirely displace the role of the lawyer’, PwC says, enabling ‘smart’ contracts to be carried out business-to-business or person-to-person.
Snell said the UK legal sector has shown its resourcefulness and ability to adapt for the past 25 years. 'However, increased competition, changing client demands and rapidly evolving technology will all require attention and financial resources,’ he added.
'Firms will need to continue to innovate, remain agile and find new ways to finance what will be a period requiring significant financial investment.’