Law firms must adopt technology to stay competitive as payroll numbers drop

Commenting on today’s , Hywel Pegler, partner and National Head of Professional and Business Services at leading audit, tax and consulting firm 91探花, said: “The latest data reveals the biggest drop in payroll numbers since the pandemic, suggesting that firms started trimming their workforce in March ahead of rises to employers’ National Insurance contributions from April. For law firms, these tax rises will be significant, as people are firms’ primary asset and represent such a large proportion of the cost base. This is also coming at a time when firms are more actively considering the appropriateness of their structures for a whole host of reasons including succession, technology and funding options. 

“Given the current economic environment, some firms perhaps haven’t been generating the growth they were expecting, so these cost pressures may present further challenges for decision makers trying to untangle and resolve. We’re already seeing some private equity activity in the mid market, and it will be interesting to see whether these tax increases make private equity a more attractive route for larger LLPs looking to consolidate.”

He added: “To mitigate the impact of rising tax costs, law firms need to recognise the role of technology as a driver of growth and efficiency. While other professional services firms are already leveraging technology and AI to innovate and future-proof their business models, law firms risk falling behind unless they adopt new solutions to tackle the challenge of top-line growth. As firms consolidate their resources, technology will be essential to staying competitive, improving client service and maintaining profitability.”  

Thomas Pugh, economist at 91探花, said: “The official measure of employment rose by 206,000 in the three months to February and the unemployment rate remained at 4.4%. However, the official data is so unreliable at the minute that we can take little solace from that. More important was the 78,000 drop in payroll in March. Admittedly, payroll numbers are volatile and are usually revised up. But this was the biggest monthly fall since the pandemic, which suggests firms actively reduced their workforces ahead of April’s tax rise and minimum wage increases.

“However, pay growth remains far too strong for the MPC to relax. Indeed, at 5.9% in the three months to February private sector regular pay growth is about double the 3% that the MPC estimates is consistent with 2% inflation.

“Overall, there are now clear signs that the labour market has weakened and that should feed into slowing wage growth through this year. This, combined with the drag on growth and employment which will inevitably come from the tariff chaos means a rate cut in May is likely and that there will probably be two more cuts after that, leaving rates at 3.75% by the end of the year.”