The War for Talent: Managing Employee Costs in Law Firms

Competition for talent has revived in the legal market after a brief lull during the pandemic, with pay levels on the rise. US law firms are still exerting pressure on the market, with newly qualified salaries hitting £170,000-£180,000 and other City firms are assessing how to compete at these levels, with other law firms experiencing the ‘ripple effect’ in their own market. However, our analysis of the accounts of the top 50 law firms for the 2021-2022 year suggests that law firms are managing these pressures effectively.

The top 50 firms’ accounts filed at Companies House show that law firms largely kept staff costs under control for the year to Spring 2022. They rose 7%, but with headcount increasing by 4% for fee-earners and 3% for support staff, the average increase per head was much lower. Despite the headlines on associate salaries, there is no evidence that law firms were allowing the war for talent to get the better of their cost discipline.

However, this was a period of relatively benign inflationary pressure. The impact of the war in Ukraine on food and energy prices was only just being felt at the end of this period and the long term impact was not yet clear, and central banks were only just starting to consider raising interest rates. The rapid acceleration in the subsequent months  has prompted rising pay demands across the public and private sector and the legal sector has not been immune.

Equally, these figures for the year 2021-2022 need to be viewed in the context of a reopening economy. In many cases, law firms had experienced low levels of staff turnover during the pandemic and as the future became more certain a number of individuals sought alternative firms to work at or, following the experience of the pandemic, left the legal sector completely.  This led a lot of firms to enter the recruitment market to replace people who had left.

This hiring boom appears to have started in the 2022 calendar year with a surge in partner hires. A report from recruitment consultancy Edwards Gibson showed a near-record 480 partner hires completed in 2022, compared to an average of 441 partner hires per annum over the past decade.

Equally, there is evidence that UK law firms have been forced to respond to higher cost of living pressures and competitive threats later in 2022. Bird & Bird, for example, gave its new lawyers a 24% pay rise. Firms have also had to cope with a shift in lifestyle expectations post-pandemic, with increasing demands for home-working. There are reports of senior women looking to move to smaller firms for better treatment and shorter hours. As the world opened up post pandemic the balance of power between the firms and their employees shifted significantly in favour of the latter and is only now starting to be clawed back.

A boom in hiring, plus rising pay demands will have raised costs for law firms at a time when some will be feeling that demand for legal services looks increasingly fragile. Deal activity is struggling in the face of economic uncertainty, rising interest rates and stubbornly high inflation.

As such, higher costs could collide with weaker revenue growth in the year ahead. However, the accounts for the 2021-2022 year should give some reassurance that law firms are adept at managing their staff costs in different environments. They were not shy about taking decisive action during the pandemic and should ensure they continue to act should they come under further pressure in the months ahead.