Employment costs outpacing revenue growth at law firms as investment slumps
Turnover up 24% in five years but labour costs up 32%. Investment as a proportion of turnover down from 3% to 1.8%.
Eployment costs at UK law firms have outpaced revenue growth over the last five years as investment has slumped, according to research by Millnet, a leading British document and data processing business to the legal sector.
According to the research, based on data from HMRC and Companies House covering all 32,501 registered legal practices in the UK, while turnover rose by 24 percent between 2018 and 2022, from £35.5 billion to £44 billion, employment costs jumped by 32 percent, from £11.6 billion to £15.3 billion over the same period.
Gross Value Added (a measure of productivity: the value of the amount of goods and services that have been produced, less the cost of all inputs and raw materials that are directly attributable to that production) of the UK legal sector has risen in line with turnover, 24%, from £27.6 billion to £34.2 billion.
Turnover of UK law firms, 2018-22
Millnet points out that the disappointing productivity performance of the UK legal sector is likely explained by a combination of skills shortages, home working and a slump in investment. Capital expenditure as a proportion of total turnover fell from 3 percent in 2018 (£828 million) to 1.8 percent in 2022 (£783 million).
Steve Chadd, Managing Director of Millnet, comments:
“The low productivity growth in the legal sector over the last five years mirrors a wider trend across the economy. These figures suggest that the problem for UK law firms is underinvestment in capital and, to a lesser extent, skills.”
“Capital expenditure as a proportion of turnover has slumped in recent years. The legal sector invested a significantly higher proportion of revenues than the accountancy sector in 2018 but they are now investing exactly the same proportion.”
He adds:
“Law firms have been ramping up pay, especially for newly qualified solicitors, as the war for talent has intensified but running parallel with this has been a decline in billable hours. As profits fall, the temptation is to scale back investment but that can impair productivity growth. It can be difficult to break out of that vicious circle.”
According to Millnet, despite the figures painting a worry picture for Finance Directors in the legal sector, law firms are outperforming their peers in the accountancy sector on some of the same key metrics.
Employment costs of UK law firms, 2018-22
While turnover in the accountancy sector has jumped by 48% since 2018, from £29.8 billion to £44.3 billion, employment costs have rocketed by 83%, from £12.3 billion to £22.4 billion. The increase in employment costs greatly exceeds the increase in GVA over the same period: GVA rose by 51% from £22.9 billion to £34.5 billion.
Accountancy firms did manage to increase net capital expenditure, from 1.2 percent of turnover to 1.8 percent (£345 million to £775 million) but that is still markedly less than the professional services sector as a whole, which stands at 2.9% (£11.5 billion out of a combined turnover of £403 billion).
Steve Chadd says:
“It will be small comfort to finance directors at law firms that their counterparts in the accountancy sector are facing similar, if not worse, dilemmas. While professional services firms have scaled back capital expenditure on physical assets like office space, there is little sign so far that investment in intelligent automation processes and AI is reaping significant productivity gains.”
