'Mid-tier' firms urged to rethink business strategy

The profit margin gap between the UK's top five law firms and their competitors has almost doubled, raising concerns over the latter's ability to retain and attract new business.

New figures released by consultancy Edward Drummond & Co revealed that the gap between the Magic Circle and Hogan Lovells and those firms ranked 21-100 had increased from 6 per cent to 11.5 per cent in the last five years.

The figures show that profitability reached 32.5 per cent and 21 per cent respectively in 2015/16, compared to 30 per cent and 24 per cent respectively in 2010/11.

The consultancy attributed the growing margin to the ability of larger firms to access more profitable and higher margin work, such as corporate finance and M&A deals.

'Big ticket' M&A work was said to escape firms outside the Magic Circle due to a perception they lack the scale to take on substantial projects, according to the consultancy. The emergence of increased competition from 'boutique' firms has also had a negative impact on 'mid-tier' profit margins.

Despite the leading firms having an edge on larger projects, thanks in part to greater marketing and IT resources, Edward Drummond & Co said there was scope for mid-tier firms to improve their margins by placing greater focus on 'rigorous strategic planning'.

For their new ventures to be effective, the consultancy said, it was imperative that mid-tier firms dramatically ramp up in-depth market research and competitor analysis while also ensuring a thorough understanding of the potential opportunities and risks of the work.

Firms were warned that without carrying out detailed due diligence, they could risk seeing seemingly profitable new business ventures suffer or even fail.

Neill Fry, senior partner at Edward Drummond & Co, said: 'Analysis of competitors, identifying gaps in the market and targeting potential clients are all steps companies must carry out before committing to new business lines. Market research is easy to underestimate; however, when done properly, it can make a significant difference to your chances of success.'

Fry warned that if firms failed to place the necessary emphasis on strategic planning, they risked a situation of 'one step forward, two steps back as investments fail to make economic returns'.

'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. It's always a good idea to consider new avenues of business, but many companies rush into them far too quickly and end up making decisions without full information.'

Matthew Rogers is a reporter at Solicitors Journal

matthew.rogers@solicitorsjournal.co.uk | @lex_progress