The NatWest Legal Sector Report 2025: A Review

The NatWest Legal Sector Report 2025 was published on 9^th October this year, and I’m excited to once again review a report that I always look forward to reading. This is the NatWest report’s 11^th edition, and this review will mark the third Report review I’ve written this year.

Legal sector reports in review

If you’re interested in the others – I wrote about the Thomson Reuters State of the Market 2025 report back in May 2025, you can read that here, and the LexisNexis Bellwether Report 2025 in June 2025, and you can read that here.

I didn’t really rate the Thomson Reuters report because at that time, I felt the authors were heavily pushing an AI angle that I didn’t feel reflected what I saw happening in reality (at least in the firms I work closely with). Here was my overview:  Always a worthwhile read, but in my opinion this report contains too many sweeping statements that are not backed up by the data. A naivety or lack of deep knowledge of the UK legal market by the authors (or maybe it was written by an AI bot!). Some interesting raw data, but a lack of nuance in the interrogation and reporting. A missed opportunity by Thomson Reuters to deliver really insightful content on the UK legal market in 2025. Sorry not sorry.

I was more impressed with LexisNexis’ report however, I criticised the authors for failing to include data about the seniority of respondents. It was a small point though and overall, I rated the report stating: This year’s Bellwether Report is, like every year, an interesting snapshot on the sector, and a great read for anybody either in practice or who works alongside or sells to lawyers.

When I read these reports, I’m always aiming to draw parallels between the reporting and my own experience working with a range of law firms of varying sizes and specialisms. It remains the case that a lot of our clients are boutique or specialist, some based in Manchester and the North more generally, others based in London and outside of the UK.

My reviews tend to comment upon the Report content and statistics utilised, and highlight the bits that I find particularly interesting or different to my experiences or what I’m seeing on the ground. It’s essentially a bit of a TL:DR.

Anyway, let’s see how NatWest’s report gets along…

NatWest Legal Sector Report 2025

Methodology

This year 110 participants took part in the research process, compared to 308 for the LexisNexis research and 364 for Thomson Reuters. A relatively small sample, and this is something to take into account when you read the report. The firms surveyed had turnover ranging from £1million to £200million, with an average turnover of £17million (I’m assuming median average as this tends to have been used throughout to measure averages).

Trends identified in the report

Reading the report, the most obvious trend that crops up again and again is a focus upon improving structures, practices and ‘ways of doing things’ in order to drive better margins, which appears to have been successful for many of the respondents.

This is so interesting as I’ve long observed that the legal sector loves nothing more than chasing new shiny things, particularly new business – and often ignoring the multitude of opportunities available just by examining their current book of work and former / lapsed client lists. That firms are taking time to tighten things up and invest in structures, process and technologies (and by the looks of things avoiding excessive cost saving by redundancies) is very interesting and it’s something I’ll be watching carefully over the next few months. Does this mean that 2026 will be the year of cross- and up-selling as firms look to improve those margins even more? Who knows!?

The report looks at various drivers for this renewed focus on better rather than more, and these appear to include basis period reforms, challenges with recruitment / retention (driven by a crazy market creating higher and higher salaries and seemingly ever reduced fee earner loyalty) which naturally put pressure on margins, along with concerns around exposure with regards to interest income. I also wonder if the current craze – AI and the race to utilise this technology – has given firms pause to consider how else they might spruce up existing systems to generate better returns.

Finally, the report identifies external investment into the sector as a key driver and I wonder therefore if this housekeeping may, for some firms, come in readiness for discussions around investment. It’s hardly rocket science to recognise that the firms displaying good margins, strong systems and increased profitability are likely to be of interest to those with money to spend in the sector.

Perhaps not surprisingly, optimism is high but not as high as last year with “84% of firms feeling positive about the future, referencing strong growth in both fee income and profitability. This is a slight decrease from 90% in 2024.”

Some TDLR stats

Some at-a-glance stats that I found interesting:

• Median PEP is up by 23% to £340,000.
• Small firm PEP (defined as up to £5million turnover) increased by 8% to £204,000.
• Large firm PEP (£5million and above turnover) increased by 23% to £372,000.
• 89% of firms expected fee income to further increase in 2026.
• Strongest team performance: private client, residential property and commercial property.
• Weakest team performance: litigation, family and commercial and transactional work.
• 10% year-on-year growth level in profits per fee earner to £158,000 (2024 £144,000)

Immediate points of interest for me – improved PEP as a result of improvement in core profit margins (reduction in people costs). Does this signify a change in direction of the pendulum? Is the market settling down, or are firms qualifying out from silly salaries? Or something else?

The report also states: “This improvement in margin seems to have arisen from firms focusing on productivity; looking to increase average chargeable hours and recovered time. Many firms have been investing in improvements in time capture, scoping and general matter management to achieve this. This issue remains pivotal to many firms as we move into 2026.”

The move to tighten up on processes, improve productivity and basically run a tighter ship is also reflected in lock up (I always find lock up statistics fascinating! All that potential cash just sitting there… more on this below).

“There were modest improvements in lock up in 2025 compared with 2024 with median lock up days reported by respondent firms of 128 days in 2025 compared with 133 days in 2024 for the same firms. Drilling down on lock up we note median debtor days were 36 (2024 38 days) and work in progress (WIP) days were 92 (2024 97 days).”

Focus on recruitment and headcount

Reflecting on recruitment and retention, 21% of firms (compared to 9% in 2024) are not planning any growth in headcount in 2026 and 49% are expecting headcount to grow by up to 5%. Perhaps these figures indicate that these law firms are ‘over’ the crazy recruitment market that has made recruitment and retention a real problem for many over recent years. This may be linked with the move to improve margins as firms look to do ‘more with less’ rather than going to market in a market where fee earners have been demanding silly money and offering low or no loyalty in return. NI changes will also have been a consideration.

Of course, the above stats can also be considered the other way around with “77% of firms expect their headcount to increase in 2026. In the 2024 NatWest Bank survey 88% of firms expected their headcount to increase in 2025.”

However you look at the figures, it looks like recruitment is being approached with some caution.

AI topline

It wouldn’t be a 2025 Report without a section on AI: “Half of survey participants are actively engaged in using AI in their business, although most firms are using this for administrative activity and general matter management rather than delivering legal advice. In the NatWest Bank 2023 survey only 2% of firms reported using AI in their business.”

I actually would have liked to see more AI reporting here as the jump in usage of AI from 2023 to 2025 is staggering. Although it is clearly here to stay, I hope this and the other reports continue to focus upon the technology, as I want to see how this shakes down in practice. Will AI deliver the revolution some are promising, or it will it simply deliver solutions that allow us to do the same things – just better, more quickly or in a slightly different way to now?

It’s also important to note that the flip side of the 50% of firms adopting AI means:

“50% still reported that they were not using AI in any form in their firms.

Mike Leeman from BLJ Solicitors provided the following comments, and he think he’s so right that firms need to ensure any time savings made by AI need to be reflected in improved margins, whether that’s via cost savings or increased fees.

“We see a challenge for firms in securing the productivity improvements from AI. We can see the time savings but unless this results in fee earner time being used productively elsewhere or other people costs reduced there is no overall benefit. This may take time for law firms to access as it usually involves decisions about people.”

Also worth noting is that the biggest deployment of AI current is in respect of admin, firms are not tending to utilise AI in advisory or technical role.

“For those using AI, the majority (32% of the total respondents), were seeing the biggest impact on administration processes.”

External investment update

I have long found the interest by external investors in the legal sector to be a fascinating trend / move and I think this year’s statistics indicate a very fragmented / varied set of responses, which I personally think reflects the state of the legal market in England and Wales.

“71% of respondents reported that it was unlikely their firms would seek such a transaction.

“At the same time 26% of respondents suggested it was possible that such a transaction may take place in their firms and 38% of firms reported that they had been approached by potential investors.

“Looking at the activity in the market in 2025 we have seen a rising number of transactions. Respondents’ views on the impact to these transactions own businesses is varied.”

Fee growth

I love looking at fee statistics and these don’t disappoint with fee growth in 2025 increasing by between 12 – 15%, compared to 8 – 12% in 2024.

“In many cases we have evidence to suggest that this favourable variance overbudgeted income has been the result of concerted efforts by firms to improve productivity with aspects such as time capture, chargeable hours and scope management being at the centre of management focus during this period.”

I’m so enthusiastic about what these improvements in time capture, chargeable hours and scope management mean for the law firms making and adopting these changes, and I genuinely hope they continue to reap the rewards of undertaking this hard work.

“The most common projected level (42% of participants) is growth in fees of between 5% and 10% in 2025; in the 2024 NatWest Bank survey 36% of firms projected that level of growth for their 2024 financial year” I really love this growing confidence and hope these figures come to pass in 2026.

WIP, Debtor Days and Lock Up

I’ve long found Lock Up fascinating as a concept and this year is no different. I think that the Lock Up statistics further support the suggestion made in the Report that overall firms appear to be working hard on their internal processes in order to improve margin, and small firms appear to be doing incredibly well at reducing their WIP figures. Conversely WIP has increased in the larger firms. Why is this?

“Survey firms reported a median of 92 days of turnover (fees) invested in WIP reflecting a five-day reduction for the same firms in 2024 where the median was 97 days.

“The median result for small firms of 91 days reflects a material reduction from 114 days for this group in the prior year, but for large firms the shift is adverse with an increase from 86 days in the prior year to 93 days in the 2025 survey.”

Debt day figures are less impressive but still broadly improved from 38 days in 2024 to 36 days in 2025. Small firms 32 vs 33, and large firms 28 vs 40 days.

Sector Outlook and Topical Issues

I love this graphic below so much, and I’m replicating it here because it says everything it needs to about what’s keeping law firm owners awake at night in 2025 compared to 2024 and 2023. Recruitment is down, productivity is up along with margins and cash flow – no surprise here if you’ve read the Report.