With the recent UK budget, it’s clear that businesses, including our law firm clients, will face challenges from the employer NI changes announced. For people-driven firms, like those in the legal sector, these shifts will make profit growth increasingly challenging.

Rising Staff Costs and Margin Pressure 

For law firms, staff remains the single largest cost in the P&L. According to a recent PwC survey, law firm expenses are already increasing due to inflation and fierce competition for talent.  With the new UK budget changes, law firms are looking at a further ~2% increase to their people costs in 2025.  This is quite likely to lead to lower pay rises and bonuses, plus potentially redundancies. 

To date, many firms have kept their margins stable by raising client rates, but this approach has limits, particularly as corporate clients will also be facing the extra ERs NI cost burden.  

As BigHand’s research confirms, demand for legal services is declining against a backdrop of corporate legal teams using technology / AI, with 34% of clients reducing the number of panel firms they use.  For smaller or regional firms, which often face limitations in raising rates, these changes could be particularly difficult.  

As a result, firms will need to prioritize efficiency of services and productivity improvements - and likely, increased investment in technology - to maintain their profit levels. 

Three CFO Strategies for Navigating Cost Headwinds 

From a CFO’s perspective, here are three areas for law firms to consider as they face down these margin challenges: 

1. Reduce Revenue Leakage & Focus on Cash

Focus on those areas which can materially improve utilisation, realisation and collections; have 1 or 2 key initiatives in place which must have exec buy in:

1. We’ve seen large improvements in utilisation and realisation rates from our customers investing in Resource Management and benefitting, as a corollary, from being an inclusive employer
2. Having accessible cash will remain critical – supporting lawyers, with relevant data can improve billings & collections and investing in matter pricing/budgeting processes and tools can radically improve realisations and collections

2. Maximise Lawyer Productivity

Given that staff is the primary P&L cost, productivity improvements are essential. A focus on reducing non-billable hours and shifting these tasks to lower-cost options, like tech-enabled solutions or dedicated support teams, can help drive down costs. This approach can also free up lawyers to focus more on billable work, enhancing revenue potential.

3. Optimise Revenue Programs

Leverage your firms competitive advantage and work across the firm to understand how to cross-sell more of the things you are the best at.  A joined-up, client-centric approach to cross-sell can maximize the potential of existing relationships.