USA Top 50 LLP accounts: reasons for growth
From this year’s accounts, it’s clear to see that firms have struggled to pass on increases in their cost base to clients. Rising costs in salaries and energy were also joined by increased expenditure in IT.
This year’s analysis of the UK’s top 50 law firms’ audited financial statements (where they operate as UK LLPs or companies) for the year ended in March or April 2023 appears to show the UK legal market in rude health.
Total revenue for the top 50 firms was just under £24 billion, up 8.54% on the previous year.
Six firms achieved growth of 15% or more (albeit some of this was a result of acquisitions or mergers) and nine achieved less than 5%, although a number of these achieved significant growth in the previous period, suggesting that 2022/2023 may have been a period of consolidation.
However, during the period of these results, UK inflation peaked at over 11%, meaning that growth of only 8.54% suggests that in real terms firms have on average gone backwards. Maybe this doesn’t matter, as the well-known phrase ‘revenue is vanity, profit is sanity’ says we should look further down the profit and loss account to see if these firms have been paying more attention to cost control than revenue growth.
During the pandemic, the average operating profit margin (of the top 50 law firms as disclosed in their annual financial statements rose above 30%. This was, perhaps, unsurprising, as while revenue held up, costs were slashed with firms expensing little or no amounts in areas such as travel, entertaining and recruitment. In the year 2020/21, operating margin was on average 32.95%, rising slightly to 33.11% in 2021/22.
However, the increase in the actual operating profit generated by the top 50 firms in 2022/23 was just over 1%. Put another way, almost every £1 of additional revenue earned in achieving growth of 8.54% went towards paying additional costs. Clearly, firms have struggled to pass on increases in their cost base to clients. As a result, operating profit margin for 2022/23 was just above 30%, at 30.77%.
Significantly, rising costs in traditional areas such as salaries and energy were joined by increased expenditure in Information Technology. Whilst some of this investment should deliver efficiency savings in the long run, these may take time to materialise and other areas of IT spend, such as cyber and data security, may simply be additional costs businesses must absorb to ensure they remain competitive.
Interestingly, during 2022/23, the number of partners at the top 50 firms increased by 5.19%. With a much smaller increase in profits, the average profit share for a UK top 50 partner during this period will have fallen, at a time when their employees would likely have received a pay increase of anything between 5-10%.
For full details of the analysis of the top 50 firms’ financial statements for the year 2022/23, download our report here.
If you would like to see how your firm compares to the top 50, please fill out your details here and a member of the team will be in contact to benchmark your firm using our interactive dashboard.
