22 February 2023 Mini Series: Business of Law Firms - ABSs yet to overtake law firm profitability

Business of Law Firms
ABSs yet to overtake law firm profitability​

What do you need to know this week?

This week’s Business of Law Firm series looks at a rather glibly titled The Lawyer article, “Your accountant friend is poorer than you”. It ranks the profitability of one of the Big Four accounting firms, KPMG, against seven mid-market UK firms and concludes that for four out of seven among the mid-market group have bested KPMG in terms of profitability, with KPMG reporting a 25% increase since 2020.

The following mid market UK firms have grown their profit per equity partner (PEP) by more than 25% since 2020 (data courtesy of The Lawyer):



Meanwhile, Devonshires, Stephenson Harwood, and Clyde & Co reported PEP increases during the same period of 15%, 12% and 6% respectively.

Why is this important for your interviews?

“All well and good, TCLA”, you may be thinking, “but why are we comparing professional service firms like KPMG which specialise in tax and audit with law firms?” A good question!

The answer dates to 2008 when the Legal Services Act 2007 (the LSA) came into effect. One of the most substantial pieces of reform contained in the LSA was the liberalisation of the rules governing the ownership of law firms. Prior to the LSA, only individuals regulated by the Solicitors Regulation Authority (the SRA) could own businesses that provided legal services (i.e., the equity partners that owned law firms). However, following the LSA, from October 2011 onwards, any business can provide legal services under the new “Alternative Business Structure” model (provided they obtain the appropriate licensing).

At the time, many UK lawyers, particularly in the mid-market, were concerned that the large professional service firms like KPMG, Deloitte, EY, and PwC would begin offering legal services and consequently encroach into the legal market and eat away traditional law firms’ share of the market. While the Big Four did indeed move into the legal market, as The Lawyer article demonstrates, more than ten years on, mid-market law firms are holding out.

Interestingly, as the article briefly touches upon, among the four firms that outperformed KPMG’s profitability, CMS and Pinsent Masons took advantage of another element of the LSA reform, which allows law firms to provide services other than legal advice. Pinsent Masons now bills itself as a “professional services firm with law at its core” and CMS’s brand logo in the UK reads, “Law • Tax • Future”, referencing the tax advisory services it offers clients in addition to a full suite of legal services. In other words, in an effort to stave off encroachment from the professional service firms, many law firms have gone the other way and diversified their revenue streams to complement their law offerings.

In the context of an application question or an interview, it is always helpful to appreciate the big picture so you can contextualise questions related to the market and the competitive forces law firms are up against.