One in three law firms are ailing financially through squeezed profit margins.
The PWC Annual Law Firms’ Survey report 2013 reveals that firms outside of the top ten are at risk financially and all categories of firms below the top ten are suffering declining profit margins. PWC are concerned that the medium-term prognosis for many firms remains uncertain and that survival is not assured.
One of the problems the legal profession has faced in recent years is one of over-supply with new entrants into the marketplace and a falling demand for legal services in a challenging economy.
PWC identify a widening gap between the top ten firms and the rest in terms of profit margins. The 2013 report indicates that margins in the top ten firms are 14 per cent higher than in the next tier of firms- the 11th to 25th largest firms. Almost one in three firms outside of the top ten have net profit margins less than 20 per cent with a number of firms reporting profit margins alarmingly close to just 10 per cent.
Declining margins are following a trend with the 2013 survey showing falling margins for the 4th consecutive year. The average margin for firms in the top 11 to 50 bracket is 24.4 per cent this year compared to 30 per cent in 2009. Top ten firms have enjoyed an average profit margin of 38.5 per cent in 2013.
Firms are advised to restructure their businesses if they want to survive beyond even the short to medium term, according to the report. Whilst firms outside of the top ten are facing declining profit margins smaller firms need to consider how they can deliver high quality services more efficiently. The report foresees investment in technology as necessary for firms to meet the changing and growing demands of clients but warns that the ability to raise finance to pay for it will be a prohibitive factor for some firms.
Law firms will also need to examine their fee structures, according to PWC, and they suggest that fixed fee arrangements, standardisation of services and the passing of work to cheaper paralegals and support staff, will help deliver more cost effective legal services to clients.
The changing face of human resource management across all businesses and professions will also play a part in legal recruitment in the future. Firms are expected to have smaller core teams of employed full-time personnel, supported where necessary by part-time staff, and self-employed workers on zero hours contracts.
Perhaps not surprisingly profit per partner is higher in the largest firms with an adjusted average of £1million for equity partners in the top ten firms. The figure represents an increase of 6.1 per cent over the previous year. PWC attribute the increased profit per partner to tighter budgetary controls through cost reductions and employee and partner headcount reductions.
The Solicitors Regulation Authority says there are 10,726 practicing firms in England and Wales- 200 fewer than the previous month and the lowest number since they started keeping records in 2009.