Beyond the PEP

Beyond the PEP

The City Firms Really Winning on Profitability

The City’s annual obsession with revenue growth, Profit Per Equity Partner (PEP), and league table rankings makes for great headlines, but they rarely tell the full story. After a decade of working closely with law firm leaders and partners, I can tell you that revenue is often a vanity metric. If you want to know how a law firm is actually being run, you need to be looking at the profit margin.

A recent analysis by legal consultant Adil Taha (Taha & Co), highlighted by Non-Billable, shifts the focus from scale to efficiency: which firms are the best at converting income into actual profit?

Discipline Over Scale

Size isn't everything. At the top of the table sits Macfarlanes, boasting a standout profit margin of over 55%. This isn't a fluke; it's the result of years of deliberate, disciplined management. Similarly, Fladgate has climbed the ranks by prioritising focus over unnecessary bloat, resisting the urge to expand just for the sake of it.

Even among the elite, the story is changing. While magic circle giants like Clifford Chance reported record PEP of £2.11 million in 2025, the real story lies in how that money is made. Is it through high-margin, complex legal work, or is there a "hidden" engine driving those numbers?

The "Interest Income" Addiction

One of the most revealing, and perhaps uncomfortable, trends of 2025 is the reliance on interest income from client accounts. For many law firms, this "non-legal" income has become a vital cushion:

• The Median Grip: In 2025, a median of 21% of PEP across the sector arose purely from interest profits.
• The Over-Reliant: For the top quartile of law firms, interest income accounted for 35% or more of their PEP.
• The Risk: With the Ministry of Justice (MoJ) proposing to seize up to 75% of interest from pooled client accounts in 2026, many law firms could see their margins vanish overnight.

If a law firm's profitability is tied to the Bank of England’s base rate rather than legal value creation, its foundation is more fragile than it looks.

A Market Splitting in Two

We are witnessing a clear bifurcation in the UK legal market. On one side, you have law firms with genuine pricing power and disciplined cost bases. On the other, firms are being squeezed by rising associate and solicitor salaries which, despite a slight "levelling out" in late 2025, still command a premium for top talent.

As a partner recruitment specialist, I’ve noticed that the old assumption, that a bigger law firm is a safer platform, no longer holds. Solicitors and associates are becoming more nuanced in their career moves, looking past the headline salary to the actual resilience and quality of the business.

"The question for any partner considering a move isn't 'Who pays the most today?' It’s 'Which platform will still make sense in five years?'"

What profitability tells me as a recruiter

As a partner recruitment specialist, profit margin is one of the first things I look at, even if it’s rarely the first thing a candidate asks about.

Why? Because margin quietly shapes everything else.

Firms with strong margins can:

• invest properly in people
• absorb lateral risk more confidently
• offer credible long-term platforms
• avoid knee-jerk reactions when the market tightens

Firms with weaker margins tend to:

• over-scrutinise hires
• push utilisation harder
• become reactive around costs
• struggle to balance pay, progression and culture

This is one reason we’re seeing a clear increase in succession-led roles, positions where firms already have the work, but need the right person to inherit, stabilise and grow it.

In a more cautious market, certainty matters.

What Law Firm Leaders Should Be Asking

Growth for the sake of growth is a dangerous game. Instead of asking how to get bigger, leadership teams should be asking:

1. Is our growth profitable and sustainable?
2. Are we relying on "unearned income" to mask structural inefficiencies?
3. How will our margin hold up when the market turns or regulations change?

The law firms getting this right aren't just the most profitable; they are the calmest. By maintaining a clear identity and a disciplined cost base, they remain the most attractive destinations for the legal recruiters and top-tier solicitors who drive long-term success.

Looking for a more resilient platform for your practice? As a legal recruiter and partner recruitment specialist, I help senior solicitors navigate the complexities of the City market to find the law firm that offers true long-term stability.

Related Articles:

What Are The Biggest Law Firms?

US Giants vs. Magic Circle Firms

The 2026 Effect