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Soaring NQ salaries and falling profits at elite City law firms

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It’s not a winning combination

The London junior solicitor pay war sparked by runaway US MoneyLaw salaries is putting a strain on budgets as profits fall at elite UK law firms.

The uncomfortable combination of higher outgoings and disappointing incomings — laid bare in PwC’s 2017 ‘Law Firms Survey’ — presents a conundrum for the nation’s big legal players.

Should they continue to compete with their American rivals — which have boosted their London offices over recent years and are now enjoying a favourable exchange rate — or should they perhaps try to establish a new more modestly paying model?

Staff costs for fee-earners at the top ten largest UK firms rose from 24.3% to 25.5% this year. In the top 11-25 bracket, the rise was from 27.1% to 28.2%. The upward movement has coincided with jumps in magic and silver circle newly qualified (NQ) solicitor pay to around the £80,000-£90,000 mark. These firms have found themselves forced to boost rookie remuneration in response to the whopping £100,000-£140,000 NQ salaries being paid out by US firms’ London offices.

What they pay and how hard they work -- The Firms Most List

The average profit margin at the top 10 UK firms, meanwhile, fell for the third consecutive year to 36.9% and is now lower than in 2012. Among the top 11-25 firms, the average margin fell for the second year, from 29.2% in 2015 to 27.7% in 2017.

But headline-grabbing junior lawyer pay is far from the only reason for the profitability plunge. Indeed, non-fee earner staff costs have actually risen more sharply (see graph below), while expenditure on IT has soared a whopping 25% at the top ten UK firms.

UK law firms’ costs

PwC Law Firms’ Survey 2017

The real problem, though, is very average fee income growth. While over 70% of the top 100 firms surveyed by PwC saw fee income grow, this was limited to an average increase of between 2.3% and 3.7%.

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13 Comments

Anonymous

The US law firms have wanted to put the MC law firms out of business for years.

It’s an anomaly that, since the takeover of British finance houses by American banks since the 1980s, professional services firms in law and accountancy have remained largely British, applying English law and professional ethical standards. They hate it. There’s no way Allen & Overy would merge with Latham.

The financial crisis provided the opportunity for US law firms to flood the London market with cash – they are unlikely to make much profit for the New York motherships from their London offices, given rent and salaries. It’s an interesting thought how long they are prepared to throw money at London for.

US law firms like to hire and fire. One positive of Brexit for them will be much reduced employment rights. Ultimately, however, they will struggle to make the kind of money they expect from London, because UK litigation is managed by judges to ensure that the kind of speculative high-return litigation seen in New York, or in mass torts, is not really replicable in the UK.

The MC just has to weather the storm until the Yankee masters realise this and pull the plug. If I were a partner at a US law firm, I’d be paying my mortgage down like one-o before the spout of money is turned off.

Anonymous

I’ve never heard such trash. Find me a US firm that moved to London post-financial crash. Many have been operating here for 15+ years and continue to do so.

US law firms are not trying to oust the MC firms. They are offering their US clients access to the UK market without having to switch provider – an easy transition, efficiency one may say, by keeping all the matters of one client within the same firm.

If US law firms has been making little money, they would not remain open. They would not increase NQ salaries. They would not constantly be increasing the number of trainees they hire. They are growing, profitable, and are here to stay.

Anonymous

It’s not the raising salaries which are the problem, but the dead-weight 1,000 year old equity partners.

Why should an associate make £110k and a partner £2-3m? Entirely disproportionate.

Anonymous

Because the partner owns part of the business and the associate does not.

Anonymous

210k and 1.9-2.9m would be a lot more fair

Anonymous

False equivalence, you forgot gearing. Multiple trainees and associates per partner.

Logic

Why is it not a winning combination?

An extra £10k for NQs is nothing in the grand scheme of things for firms, but can make a big difference for junior lawyers.

In the long term the loyalty you will get through increased junior lawyer satisfaction will outweigh the small outlay. Dinosaur equity partners do not care though. They will be out the door by the time those benefits come to fruition.

Anonymous

I don’t see the problem, unless the goal is for a tiny group of people to make a fortune without sharing it a bit.

Anonymous

No, the goal is to be the best you can be. For that you need the best partners. To have the best partners you need to pay the best salaries.
If you don’t keep up, the best talent will leave and profits will fall, leaving all parties less well off.

Anonymous

Would prefer to see articles about the NQ salaries in the regions.

Irwin Mitchell Partner

It’s called private equity for a reason – it’s not yours, it’s MINE.

Anonymous

The problem is the lack of fee income growth. But law firms aren’t different to other industries in that the whole market has been stagnant post 2008. All the lawtech stuff is cover for reducing trainee and associate numbers to prop up partner profits. Beware of “innovation” – this has become an upbeat corporate euphemism for managing low growth.

Anonymous

I feel a bit sorry for Alex having to salivate over these figures.

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