Navigating Growth in an Era of Rising Costs – The Challenge for UK Law Firms in 2026

The Royal Bank of Scotland Business Legal Report 2026 highlights continued optimism across the UK legal sector, despite slower fee growth, rising costs and pressure on profit margins.

Prepared by Andrew Allen, Partner with PKF Francis Clark, the report is based on responses from 112 firms with combined annual revenues exceeding £2.4 billion. The report examines financial performance, technology investment and changing business priorities and is an excellent tool to benchmark your firm’s performance in a wide range of financial KPI’s.

Optimism remains strong despite economic pressures

90% of participating firms are optimistic about the future, up from 84% in 2025. However, those describing themselves as very optimistic fell from 30% to 27%.

Rising operating costs, technological change and competition remain significant challenges. Sustainable growth will require careful financial management and strategic planning.

Fee income growth slows

Median fee income growth fell to 7% in 2026, down from 12% in 2025. Larger firms generally achieved stronger growth, while smaller practices reported more varied results, including declines.

Looking ahead, 36% expect fee income to increase by 5–10% in 2027. Private client work recorded the strongest growth, while family law teams were more frequently associated with lower growth.

Firms should focus on profitable practice areas, strong client relationships and pricing that reflects the value and complexity of their work.

Rising costs squeeze profit margins

Profitability remains under pressure from rising employment costs and investment in technology and AI.

Median employee costs increased from 46% to 48% of fee income. Including notional salaries for self-employed owners, the median people-cost ratio rose from 63% to 64%.

Median profit per equity partner (PEP) increased by just 2%, compared with 23% in the previous survey. Median PEP stood at £326,000, broadly unchanged from £327,000 in 2025.

Improving productivity, utilisation, delegation, pricing and matter-level profitability will be essential. Revenue growth alone cannot protect margins.

Cash flow and lock-up require attention

Median lock-up increased from 128 days in 2025 to 136 days in 2026, increasing pressure on working capital.

Lock-up measures how long work in progress and unpaid bills take to convert into cash. Longer periods can restrict cash availability and delay operating payments.

Median debt nevertheless fell from 15p to 13p per £1 of members’ funds. However, the report notes anecdotal evidence of falling cash reserves and delayed profit distributions.

Firms should closely monitor work in progress, billing, debtor balances and payment times to protect cash flow.

AI creates opportunities and financial challenges

AI adoption has accelerated, with just 5% of firms reporting no AI use, compared with 50% in the previous survey.

The most reported benefit was streamlined administration, cited by 43% of respondents. Other benefits included improved client delivery, cost savings and service quality.

However, firms must determine how to recover implementation costs and translate efficiency gains into measurable returns. While most had not introduced specific AI cost-recovery measures, 22% had changed their pricing or service options.

Successful adoption requires clear objectives, measurable benefits and safeguards for confidentiality, professional responsibility and risk management.

Talent, investment and changing business models

Workplace culture was the leading factor in attracting and retaining staff for 32% of firms, followed by remuneration (22%) and career progression (18%).

Attitudes towards external investment are also evolving. Although 60% would not actively consider third-party investment, this was down from 71% in 2024. One in five would consider investment to support growth, while others cited succession planning and realising value.

Interest income remains significant, although its contribution to median PEP fell from 21% to 14%. Changes to the treatment of client interest could therefore affect firms’ financial models.

Looking ahead: sustainable profitability

The 2026 report presents a confident sector facing mounting financial pressures. Slower fee growth, rising employment costs and technology investment are making profitability harder to improve.

For 2027, firms should prioritise cost control, matter-level profitability, effective lock-up management, targeted technology investment and talent retention.

Ultimately, sustainable growth depends not just on generating fees, but on converting them into profit and cash. Firms combining sound financial management with clear strategic priorities will be better positioned to navigate market changes.

If you would like to discuss any of the themes raised in this blog, please contact me on 07916669095 or email ih@hopkinslegalconsulting.co.uk