A third of law firms say turnover is declining while more than half say cost of labour is a growing concern

The financial performance of UK law firms continues to diverge with many high street firms struggling as demand for consumer services remains muted, according to research commissioned by Millnet, a leading British document and data processing business to the legal sector.

According to the research, which sampled nearly 200 UK law firms ranging from the Magic Circle to smaller High Street practices, 33 per cent of solicitors reported that their financial performance deteriorated in the past month, while 29 per cent said performance had improved.

The financial performance of the legal sector is significantly more divergent than the wider professional services sector. 19% of the professional services sector as a whole reported turnover increased, 21% turnover decreased - a much lower level of volatility than the legal services market.

According to Millnet, the contrasting fortunes of UK law firms reflects how exposed some firms are to the consumer services market and practice groups which are vulnerable in an economic downturn. Magic Circle and mid-tier firms are more likely to have greater resilience to weak consumer demand in the domestic market.

Steve Chadd, Managing Director of Millnet, comments:

“A much higher proportion of law firms are reporting divergent financial performance than the professional services sector overall. This reflects the greater vulnerability of high street firms in particular to the UK consumer services market. Practice areas such as residential conveyancing are highly correlated to the economic cycle and have suffered over the last couple of years.”

“At the same time specialist businesses offering low-cost online solutions in areas such as conveyancing, wills, and probate are squeezing high-street firms. These businesses have increased market share as consumers have become more price-conscious during the cost-of-living crisis.”

He adds:

“Magic Circle and many mid-tier law firms are generally more diversified in their service line offerings and are dependent for a smaller proportion of their turnover on the UK consumer market.”

According to Millnet, law firms are much more concerned about the cost of labour than other professional services businesses. 23 per cent of law firms said that the cost of labour is negatively impacting their business, compared to just nine per cent in the wider professional services sector.

The research also revealed that 59 per cent of law firms said that their staffing costs have increased over the last three months compared to just 22 per cent for the professional services sector as a whole.

Steve Chadd says:

“Staffing costs are a gnawing concern as billable hours have stayed flat or declined. Law firms have been bumping up pay for newly qualified lawyers as the war for talent intensifies but this is in the context of declining profit margins and high inflation.”

“Increasing numbers of law firms have expanded hybrid working and other work-life balance perks to attract talent. With chargeable hours flat or falling, however, there has been growing pushback against these policies. There have been reports of law firms increasing the number of days lawyers must be in the office, monitoring attendance and even tethering bonus pay to office presenteeism.”