However, many firms grew both top line and bottom line and a 5.4% increase in headcount shows a confidence with firms continuing to invest in building their teams. Participants have clear plans to increase their level of agile, remote and virtual working over the coming 18 months and the loss of key people was reported as the primary business critical risk.
Almost one in six city firm participants reported a fall in revenue this year, with the average decrease for those firms being 7%. This proportion of contracting firms has been steadily increasing for the last couple of years, so is the flat economy having a bigger impact and could this be indicative of an increasingly competitive marketplace?
With almost 30% of city firms still generating growth in excess of 10% and aggregate growth across all participants holding at 6.7%, our survey shows the legal sector is resilient and doing well despite the current economic uncertainty.
In terms of profitability there has been no real change in PEP this year. Median PEP for City firm participants remains static at £414,000. However, drill down into the data and the results are more polarised; just over one in four firms saw a fall in their total profit pool and PEP this year, while just under one in four enjoyed PEP growth of more than 10%.
Even after taking into account those firms with a falling top line, or increase in top-tier partner numbers, there are some firms whose cost base has increased this year and other firms whose revenue growth is turning straight into bottom line profit.
4 in 10 of the city firms participating
saw a fall in their all‑partner profit
pool and PEP. Median PEP
While only 4% of city firm participants are positive about the UK economy for the coming year, 70% have either a positive, or very positive, outlook for their firm. Firms clearly see opportunities ahead.
There is certainly a confidence to invest in building teams. City firms added heads at a rate equal to at least double that seen in the regions, with a 6.2% increase in non-partner fee earners being the highlight. Investment in support teams followed closely at 5.4%, preserving the fee earner to support staff ratio at 1.28, slightly up from 1.27 last year.
Average fees per fee earner only rose at an inflationary 2.2%, suggesting either there continues to be little spare capacity in the system, or price pressure is capping any upside productivity gains. If client demand for instructions and transactions holds, there will continue to be a demand for good people. We don’t appear to be seeing any sector changing benefits from advanced technology leverage just yet.
Although headcount grew, the associated staff cost has remained under control. The average cost per head rose just 0.9% this year and staff costs as a percentage of revenue remained consistent at 35%. This suggests that firms are currently mindful of personnel cost and are maintaining a cap as far as possible; creating leverage through the use of less expensive fee earners continues to be a common strategy for many firms.
Workflows and systems are high on the agenda for the coming 12 to 18 months. Seven in 10 city firms plan to increase their level of remote, agile and virtual working and around four in 10 plan to change their practice management and/or finance system and invest in advanced data solutions.
Future productivity gains will undoubtedly have technology solutions at their core and the effects on recruitment, training and development in the coming years will be interesting to follow.
This year's headline results show another year of steady performance. But look a little deeper and we find greater volatility in both revenue growth and profitability.
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