Operating profit margins at the U.K.’s largest law firms are continuing to fall despite an increased focus on efficiency, as staff costs rise on the back of weighty associate pay hikes.
An analysis of limited liability partnership (LLP) accounts for the 2016-17 financial year, carried out in conjunction with professional services firm Smith & Williamson, shows that the average profit margin for the U.K. top 50 has dipped by 1 percent every year since 2014-15.
More than half of the top 50 have seen their operating profit margin fall since 2013-14, while just four—Fieldfisher, Pinsent Masons, Shoosmiths and DAC Beachcroft—have consistently improved their margin during that period, according to LLP filings.
The downward trend is perhaps surprising given the efforts by many law firms to boost efficiency in recent years, but it can be attributed in part to a concurrent spike in staff costs across the U.K. top 50, which have risen by a total of more than £1 billion ($1.33 billion) since 2014-15.
This increase in staff costs has far outweighed head count growth, with combined spending on staff across the group rising by 18 percent since 2014-15 to £6.87 billion ($9.12 billion), against an increase of just 7 percent in lawyers and staff head count during the same period.
Individual firm increases vary significantly, peaking with a 20 percent year-on-year rise in staff costs at Stephenson Harwood, but only two U.K. top 50 firms saw staff expenses fall during 2016-17—Weightmans and legacy Olswang. Both of these firms saw staff numbers decrease during the period, in contrast to an average head count increase of 4 percent across the whole group.
The majority of the U.K. top 50 increased spending on staff by double-digit percentages last year, with 27 firms seeing staff costs rise by more than 10 percent and a further 20 posting single-digit increases.
The fact that staff costs outstripped head count increases reflects the significant associate pay increases ushered in ahead of the Brexit vote from May 2016. Freshfields Bruckhaus Deringer, for example, increased base pay for newly qualified lawyers by 26 percent to between £85,000 ($112,893) and £97,000 ($128,831), while Linklaters also significantly hiked salaries as U.K. firms moved in response to raises at U.S. rivals.
Across the U.K. top 50, total lawyer and support staff numbers climbed by 3 percent to 82,282 from 2015-16 to 2016-17. Twelve firms across the group saw total staff numbers decline, including Freshfields and Clifford Chance (2 percent and 4 percent respectively), while 13 saw fee earner numbers drop.
As a percentage of revenue, Linklaters has the most expensive staff in the top 10, spending 49 percent of its total revenue on staff costs. The figure is narrowly ahead of Freshfields, at 48 percent and a full 7 percent above the group average of 42 percent. Insurance-focused firms including BLM, Gateley, DAC Beachcroft, RPC all shell out more on their staff as a percentage of revenue, with BLM topping the ranking at 62 percent.