Significant Turnover Growth In Mid-Sized Law Firms While Lock Up Days Decline

Our latest annual legal practices benchmarking review points to encouraging signs of growth as firms feel the benefit of the improving economy, most notably through an upturn in commercial and residential property work, with confidence also returning to many practices active in corporate transactions.

“The review indicates a much more positive outlook across most firm sizes, helping to ease the considerable financial pressures experienced in recent years. In particular, the outlook for mid-sized firms – those with between 11 – 25 partners – and larger firms of 25+ partners has shown markedly positive improvement.

“After three years of limited growth in income, this year’s results show significant growth in the larger practices of 11 partners+, with growth of 13% in the 11-25 partner group and 18% in the firms with more than 25 partners. Total income for the firms in the 11 – 25 partner bracket rose from an average of £5.27million in 2013 to £5.94 million in 2014. Over the same period average total income for the 25+ partner firms rose from £10.29 million to £12.21 million. Growth in the smaller firms continued to be limited, with 5-10 partner practices growing by 3.6%, up from £2.96 million to £3.07 million.

“Fee income per equity partner has also improved noticeably in larger firms, with the mid-tier practices (11 – 25 partners) showing an average rise from £479,000 to £582,000, and for the first time in four years we have seen partner income break through the £600,000 figure with firms in the 25+ partner bracket reporting an average fee income per partner of £751,000.

“There has been positive profit per equity partner (PEP) movement across all sized firms. For the 5-10 partner firms, whilst top line fee income is up just 3.6%, PEP is up 9.9%; for the 11-25 partner firms whilst top line fee income is up 13%, PEP is up 17% and for the 25+ partner firms whilst top line fee income is up 18 %, PEP is up a staggering 44.7%.

“Financial stability is a key objective for many law firms and one of the benchmark statistics that has a direct correlation with financial stability is lock up (unbilled work in progress and uncollected debtors) and the trend over the last year has generally been a good one. By far the best improvement was achieved by the 11 – 25 partner firms whose lock up reduced by an impressive 15%, which equates to 22 days of lock up. To put this into a financial context, if an 11 partner firm had turnover of £5million and lock up of £2million, then the lock up days would be 146. If the firm improved its lock up by 22 days to 124 days, then this improves the cash in bank by approximately £301,500. This is the equivalent to over £27,400 being available now to each partner.”

Other report highlights include:

  • Wage costs are still reducing as a percentage of fee income.
  • Practice costs of rent, marketing, IT and professional indemnity insurance all saw an average reduction as a percentage of income.

“Merger activity is continuing in the sector at all sizes of practice. Much of the growth in fee income per equity partner, especially in the 25+ partner practices, has been driven by merger activity, which has had a reduction of the equity ownership group as one of its key drivers. Economies of scale have also played a part in reducing costs in areas such as IT, property rentals and marketing.

“I expect the merger activity to continue and in the smaller practices the challenges of succession planning will remain a major factor in driving mergers.”