Margins are expected to come under pressure as overheads increase
Nine out of ten small-to-medium sized law firms in the UK are optimistic about their financial performance in the coming year, a new legal benchmarking survey has found.
Commissioned by UK bank NatWest, the report also found that firms’ margins are expected to come under pressure as overheads increase in 2023, and nearly half (46%) of all SME legal firms are concerned about the labour market.
NatWest’s ninth Legal Report looks at the financial health of 68 SME law firms across England, Scotland and Wales with median annual fees of 5-million pounds sterling. The report provides a reflective analysis of law firms’ financial results from 2022 and considers the current commercial and financial outlook affecting firms today.
Whilst many small firms feel optimistic about their financial performance in 2023, the survey evidence suggests that firms’ fee rates will not rise enough to offset increased outgoings this year, placing pressure on margins. Over half of the firms surveyed expect to increase their charge-out rate by less than 5% this year, even though staffing costs could rise by as much as 10%-to-12% in many firms. Nearly half of firms (46%) identified attracting and retaining talent as their biggest concern for 2023 – above the economic outlook, cashflow or inflation.
The findings come after a period of strong finances for the legal sector, with 2021 being the most successful financial year for many firms for 25 years.
“It’s good to see that, despite various headwinds, law firms are optimistic about their financial performance in the coming year,” said David Weaver, head of professional and business services at NatWest Group. “This optimism reflects the fact that many firms have demonstrated record profitability in recent years, despite the ever-present challenges they face.
“Looking ahead, with firms predicting high people costs and overheads for 2023, it’s essential that firms keep a close eye on their margins. No one can predict the future, but firms should be working to forecast the impact that rising interest rates will have and how best to mitigate that and maintain a steady cash flow.”
NatWest’s 2023 legal report focuses primarily on firms that operate at the SME level across England, Scotland and Wales. The survey has divided the firms into two sizes. Those with annual fees of less than 5-million pounds are described as “small”, while those with fees of more than 5-million pounds are classified as “large”. The sample in 2023 extends to 68 firms, where 29 firms have annual fees of less than 5-million pounds and 39 firms have annual fees of more than 5-million pounds.
