The uncomfortable truth behind top UK law firms’ growth figures

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Weak pound disguises some mediocre recent performances

The high end UK corporate legal market might not be doing as well as it seems, with the weakness of Sterling helping to disguise some leading firms’ notably mediocre recent performances.

A study by PwC has found that foreign exchange (FX) movements contributed around two thirds of overall fee income growth and almost half of profit growth in the UK’s global top ten firms.

In other words, elite UK law firms’ financial results are being propped up by earnings from their array of international offices which are then boosted when converted into pounds at the current favourable exchange rates.

Over the summer the magic circle quartet of Allen & Overy, Clifford Chance, Linklaters and Freshfields revealed revenue growth figures of, respectively, 16%, 11%, 10% and 0.3%, and profit per equity partner (PEP) growth of 26%, 12%, 8% and 5%. Other top ten firms, such as DLA Piper, Hogan Lovells, Herbert Smith Freehills, Norton Rose Fulbright, Ashurst and CMS also saw reasonable levels of turnover growth.

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But apply PwC’s findings to these figures and they look a good deal less impressive. According to the accountancy and consulting giant, the weak pound is contributing an average of £43.7 million of revenue and £16.2 million of profit (equating to an additional £33,000 PEP) to the top ten firms.

So what happens when Sterling recovers from its post-Brexit vote plunge? Well, PwC reckons that “the overall picture is one where profitability is under threat, competition is ramping up, and the impact of digitisation is potentially overwhelming”. Indeed, one of its partners, Kate Wolstenholme, believes that “fundamental action is needed”, explaining:

“It’s clear that the future success of global operations can’t be founded on FX benefits alone. Having taken this one-off income and profit boost, it will be interesting to see the real commercial impact of Brexit on law firms start to play out in the current financial year.”

She continued:

“Undoubtedly some firms will enjoy a rise in revenue from providing regulatory advice to clients — but economic uncertainty means workflow is unpredictable, and there is also a cost of scenario planning to ensure firms remain fit for purpose for a post-Brexit environment. Firms need to plan now if they are to thrive in years to come.”

It’s worth noting that PwC isn’t a purely impartial observer in all of this, boasting its own legal services division which it has ramped up lately to offer 25 training contracts — the same number as major law firms such as Travers Smith, Reed Smith, Squire Patton Boggs and Gowling WLG.

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