Legal
sector’s renewed focus on profitability counters sporadic fee income growth
Our latest Legal Benchmarking Report reveals improved profit per equity partner figures as firms prioritise profits over fee income growth.
- All practice sizes – except one – report a marked improvement in Profit per Equity Partner (PEP) largely as a result of focusing on profitability by driving efficiencies through their business models, people and better use of technology.
- Firms may find it challenging to take advantage of opportunities to grow in 2019 as their systems, people and structures are too lean to scale up
- Increasing pressure to be more agile, increase investment in IT, invest in the next generation and to offer flexible working patterns.
The latest annual Legal Benchmarking Report produced in conjunction with our UK accountancy association MHA, reveals that the sector has a renewed focus on profits and margins in order to future-proof their businesses and combat succession issues.
Growth
in total fee income was sporadic – only achieved by sole trader practices (12%)
and 5-10 partner firms (9%). Mid-tier practices of 11-25 partners witnessed
minor growth at 0.1%, while larger firms of 25+ partners and smaller 2-4
partner practices saw income falls of 3% and 2% respectively.
Changes
in fee income per fee earner levels mirrored these findings; for sole trader
practices and 5-10 partner firms it grew by 10% and 0.6% respectively, mid-tier
firms saw a drop of 1% and 2-4 partner firms and larger practices witnessed
falls of 12%.
While
the average income for a fee earner was not dissimilar to last year, the income
range is now wider – £121k to £170k, as opposed to £136k to £169k. Although respondents
are split on whether to follow a growth or consolidation strategy, it is clear
there’s a renewed focus on profitability.
The
PEP for every firm category increased in excess of £15,000 per partner, except
11-25 partner firms where there was a 3% fall, evidencing a significant
improvement on the previous year where profits were impacted by a hard market
and increased wage demands. The report concedes it still remains ‘tough’ for
smaller practices, confirming that PEP for sole practitioner firms now exceeds
the PEP for 2-4 partner firms.
All
practice sizes, bar 25+, rallied when it came to their total net profit
percentages. Sole traders experienced the biggest leap – from 12% in 2017 to
23% in 2018; 2-4 and 11-25 partner firms managed a sluggish 1% growth on the
previous year (16% and 25% respectively), 5-10 partner firms reported a 2%
growth to 18%, while 25+ practices suffered a 1% drop to 24%.
Total
funding per equity partner continued a downward trend; in 2018 it ranged from
£25,000 for the smallest firms to £139,000 for larger firms with 25+ partners,
a marked difference from the £42,000-£228,000 parameters reported in 2017.
The
actual capital invested during the year varied depending on the size of the
firm, however larger firms and practices with 5-10 partners saw increased
levels of capital invested by their equity partners, suggesting a certain
‘shoring up’ of the business.
Lock
up remains static for the majority of practices, at around 120 days, or they’ve
achieved a reduction, apart from 2-4 partner firms who still struggle to gain
control. Their average lock up figure is now at 130 days, almost 50% higher
than five years ago. The smallest practices report a significant lock up
improvement of 11 days.
Across
the board, employment costs and practice expenses remain consistent with
previous years; only the larger practices have seen a significant increase in
expenditure compared to income. The parameters for IT spend however, have grown
from 1.6% – 2.2% in 2017 to 1% – 3.3% in 2018 – signalling an appetite to
maintain secure and robust systems.
David Smith, Managing Partner
at MHA Henderson Loggie, said:
“In
the face of challenging market conditions and increased competition, the
Scottish legal practices that are doing well are those that have identified
their sustainable competitive advantage, have a clear vision and staff aligned
with that vision. Our report reveals firms are increasingly focused on
profitability and driving efficiencies through better process mapping, but need
to avoid the risk of becoming too lean to grow. For the last number of
years firms have been focused on maintaining or improving profitability by
reducing head count, implementing disruptive technology, outsourcing,
simplifying business models. As opportunities present themselves in 2019 it may
be many firms find it very challenging to take on board too much growth too
quickly as the systems, people and structures are not ready to scale up.
“The report also puts the spotlight on the need to invest in the next generation of business leaders to ensure financial stability in the longer term. Promoting staff in order to retain them is not in itself enough to ensure survival, there needs to be a commitment to build leadership skills to complement their technical know-how in order to develop the practice. It is advisable to keep recruitment strategies under review to keep long term succession plans in mind.”
Click here to download a copy of the report.
