21 Dec 2016

Mid-tier firms struggling to lift profitability, warns new report

The profitability gap between the United Kingdom's most elite firms and those further down the ranks is getting wider and wider, sparking concerns that fee pressures are weighing down mid-level competitors.

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A report released by management consultancy firm Edward Drummond & Co has demonstrated that the profit margins for top-tier and mid-tier firms appear to be retreating in opposite directions. While the average percentage of revenue converted into profit at the UK’s top 20 firms has lifted from 30 per cent five years ago to 32.5 per cent this year, profitability has shrunk at those firms ranked between 21 and 100 from 24 per cent to 21 per cent over the same period.

The growing gap between mid-tier firms and their larger counterparts is likely indicative of the downwards pressure on fees for middle-market operators. While the enormous scope of services and resources available at larger firms empowers them to demand higher fees from clients requiring advice on complex, large-scale and cross-border legal matters, mid-tier firms are forced to battle it out with myriad other providers with equal or comparable resources. The result is a fierce competition war between mid-tier operators that has dragged down fee income.

Edward Drummond senior partner Neill Fry commented: ‘Lower profit margins mean mid-tier law firms are less able to invest in their own growth. Mid-tier firms who do aspire to move into higher margin areas of work need to properly assess the market.’

Sources: Law Gazette; Solicitors Journal

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