Law firms see 12% revenue growth in preparation for staff salary raises

According to a report by accountancy firm Crowe, law firms saw a significant increase in revenue growth in the last financial year as they prepared to reward their staff with salary raises. Aggregate revenue grew by 12%, twice as fast as the previous year. Almost half of the firms (45%) said they would increase staff salaries this financial year by over 7.5%.

The report was based on data from 50 City and regional law firms with year-ends in March and April 2022. Along with the growth in revenue, profits per equity partner (PEP) increased by more than 10% at 36% of City firms and 29% of regional ones. The mean PEP for City firms was just over £738,700, up from £640,700 in 2021, and £313,800 for regional firms, up from just under £300,000.

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However, PEP fell at exactly half of the regional firms and a third of City firms. Researchers suggest that more robust demand, coupled with efficiency and cost-cutting measures implemented throughout the pandemic, boosted many year-end profit pools. But as the sector returned to 'business as usual,' some firms found it harder to keep costs under control, particularly regional firms.

Staff numbers increased by 4.2% across all firms, with average salary increases of around 5%, resulting in "a nearly 10% increase" in staff costs. City firms "experienced less salary pressure" than their regional counterparts. As a percentage of fee income, staff costs fell slightly for City firms, to just over 36%, and for regional firms, to 45%.

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Looking at the current financial year, 45% of City firms and a quarter (26%) of regional firms said they were preparing to increase salaries by more than 7.5%. The main driver for recent recruitment was baseline salary (70%), followed by flexible working policies (48%), the firm's culture and values (38%), and brand and reputation (33%).

The report also noted that a slender majority of firms reported that their teams were working away from the office more than half of the time, with City lawyers most likely to be working remotely. Almost a third (30%) of regional firms said their staff spent only a day a week out of the office. Two-thirds of firms believed that remote working harmed the supervision of team members, and three-quarters did not offer 100% remote working.

By the end of the year, average lock-up days fell slightly – from 130 to 123 for regional firms and 144 to 143 for City firms. The proportion of firms working to improve their sustainability jumped from around half to 69%.

The report shows that the legal sector has performed well, as evidenced by solid financial figures across most measures. However, the full impact of inflationary pressures and salary shifts may still be felt in the coming months. The retention of key people has been identified as a core focus for management teams.