Profit margins at the top five UK firms and the mid-tier are going in opposite directions as fee pressure starts to bite, according to a study published today. Research by management consultancy Edward Drummond & Co has found firms in the highest reaches of the profession are turning 32.5% of their revenue into profit. Five years ago profitability was 30%.
While the top five firms flourish, firms ranked between 21 and 100 appear to have backwards on this measure: profitability was 21% in 2015/16, down from 24% five years previously.
Edward Drummond & Co said the growing gap in profit margins can be put down to the ability of larger firms to access higher margin work, such as corporate finance and M&A deals.
These firms have clients less inclined to demand lower fees as they rely on practices that can handle the scale of work they require.
The consultancy says this is particularly true in cross-border work where the largest firms take the bulk of work.
In contrast, mid-tier firms do not have the weight to attract ‘big ticket’ clients and are fighting to retain business in the face of competition from boutique firms which have emerged in recent years.
These rivals are able to ‘cherry pick’ specific pieces of work and force mid-tier firms to spend time and resources trying to position themselves ahead in the market.
The consultancy says mid-tier firms need to do much strategic planning to move into higher margin areas of work and improve profit margins.
Neill Fry, senior partner at Edward Drummond & Co, said that firms need to be rigorously analytical before launching substantial investments on entries into new markets. ’Analysis of competitors, identifying gaps in the market and targeting potential clients are all steps companies must carry out before committing to new business lines.’