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By Kevin Wheeler
This week sees the publication of the PwC 2013 Annual Law Firms’ Survey and it paints a story of woe for all but the largest firms.
Falling profit margins outside the Top 10
Overall, allowing for inflation, the UK market has been flat over the last year reflecting the challenging economic conditions and pricing pressures. However, whilst the Top 10 firms have increased their average net profit margins to 38.5%, the firms ranked 11-100 saw a fall to leave them on average with margins of around 23-24%. Approximately one third of all firms outside the Top 10 reported UK net profit margins of less than 20%.
That the firms outside the Top 10 have been battered by the economic conditions, increasing client demands in the form of falling prices, and the impact of new entrants to the market, is reflected in their profits per equity partner (PEP) figures: the Top 11-25 now record £448K whilst equity partners at the Top 10 get double at £905K.
The Top 10 are pulling further away from the “mid-market” on the back of their stronger international networks, higher quality client bases, more challenging and profitable work, including cross-border transactions, and their ability to attract the best talent at all levels from graduates through to senior lateral hire partners. The rest are left struggling to reduce costs and re-engineer the way that they deliver services to clients.
Lack of confidence in marketing
In the face of increasing competition, in a flat market, with clients demanding more for less, companies in any other sectors would have turned to their marketing and business development (BD) functions to boost profile, establish and promote a differentiated proposition, and improve the sales capability to increase market share. A clue as to why the majority of law firms have not been able to do this is provided by the latest PwC survey: a staggering 67% of law firm leaders surveyed now regard their firm’s marketing and BD function as weak or at best only adequate.
Law firms have only got themselves to blame. Management teams were too quick to cut marketing costs at the onset of the recession and this included dispensing with their most senior (and therefore most expensive) marketing directors. In many firms, these have been replaced by cheaper but less experienced junior staff. Rather than challenging the partners to “up their game” when things were getting difficult, firms have been left with “marketing service” departments who do what the partners want. As a result, a strategic approach to marketing has been sacrificed for day-to-day tactical support in many firms.
Most firms outside the Top 10 still need to recognise and face up to the market challenges that they face and develop strategies for survival. If they do not, as the PwC survey highlights, they face continued financial difficulties or even failure.
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