Foreign exchange movements contributed around two thirds of overall fee income growth and almost half of profit growth in the UK’s global top 10 firms, according to PwC's latest law firm survey. The Big Four firm warned that while investment in new and emerging markets can pay dividends in terms of top line growth, global law firms will need to make fundamental changes if they are to thrive in the future. The observation followed the revelation that a significant proportion of the UK’s global top 10 law firms’ fee income and profit growth of 8.1 per cent and 9.8 per cent respectively is attributable to a weaker sterling and resulting foreign exchange (FX) movements (4.9 per cent and 4.4 per cent of the total). The overall average impact of this on revenue and profit is £43.7m and £16.2m, or an additional average profit per partner of £33k.
Profitability is under threat
In the top 11-50 firms, FX contributed almost half of overall fee income growth (or 3.2 per cent of the overall 7.1 per cent growth) – equating to an average of £6.3m of additional revenue or £9k per head in profit per partner terms. According to the survey, while there have been signs of improved underlying performance by international offices, the overall picture is one where profitability is under threat, competition is ramping up, and the impact of digitisation is potentially overwhelming.
Law firms need to take action now, according to Kate Wolstenholme, PwC’s business services leader: '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 added that while some firms will enjoy a rise in revenue from providing regulatory advice to clients – '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.'
Strong international performance
The 2017 global findings also revealed a strong underlying performance by international offices across top 10 firms -delivering an average £11.9k to the profit growth - twice the average growth derived from the UK. Furthermore, US top tier firms are outperforming UK competitors across all key performance indicators, for example, profit per equity partner of £1,939k is 58 per cent ahead of the UK’s £1,227k figure. The figures revealed a stable headcount across global top 10 firms year on year, with top 11-50 law firms reflecting an eight per cent rise and varying international performances - net profit margins in international territories continue to lag behind the UK Top 10 average of 37 per cent, with Africa reporting an average margin of -1 per cent, the rest of Asia and Far East, 19 per cent and Western Europe and Australia 33 per cent.
Globalisation, competition and Brexit
With international clients demanding integrated international services from their legal firms, it is not surprising that issues of firm structure, service offerings and geographic location, continue to loom large according to the survey, Ms Wolstenholme said. 'While profitability from international operations has improved this year, there’s still a significant difference in the net profit margins achieved in the UK compared to offices in other territories. As they look to the future, firms must keep a close eye on this, taking into account the relative maturity of the international office network and the wider risks and rewards of having a presence in a particular location.'
She added: 'As the UK prepares to leave the EU, there are rising concerns about the implications for clients, people, firm structures and regulatory obligations - what will Brexit mean for lawyers operating across borders, where will additional qualifications be required, and how will firms gain access to the right skills set to meet clients’ international needs? With firms needing between 12-18 months to plan their transition, clarity on the future shape of the Brexit negotiations will be vital. Without it, there is a real danger that businesses may soon begin planning a hard exit strategy, a move that could have significant consequences for the UK legal sector.'