Legal Benchmarking Report

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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.

Alan Davis

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Alan is Chairman of Henderson Loggie, he is also Head of Tax for the Firm and leads our award winning VAT team. He covers all four offices providing specialist advice on technical VAT compliance and advisory, training and development.

Having spent 16 years with HM Revenue & Customs carrying out VAT assurance visits for a wide range of businesses – from small retailers to local authorities, Alan has gained considerable experience of HM Revenue & Customs inspections. He can help with planning opportunities for VAT efficiency, and can advise our clients on retrospective reclaim opportunities, securing significant VAT repayments.

Alan can also advise on other indirect taxes e.g. landfill tax, aggregates levy, climate change levy, and also offers in-house technical updates to the legal profession.

In addition to his tax specialism, Alan leads our Education Sector Group, ensuring that that team meets all the needs of the sector – from audit, to advisory and across all the services the firm provides.

David Smith

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David Smith is the Managing Partner of Henderson Loggie. As the firm’s business leader, David works closely with his fellow Partners and staff, supporting their delivery of services to meet clients’ needs across a range of sectors.

Driving growth and facilitating the implementation of the firm’s development strategy is a key role as Managing Partner, but David has also established a reputation as a respected advisor in the Professional Practice and the Healthcare sectors, amongst others.

David helps clients develop their businesses through Business Improvement Services, specifically strategic planning, sustainable competitive advantage, family business issues, leadership development, personal development, and lean management.

David also specialises in Corporate Finance, specifically investor readiness, business planning, financial modelling, fundraising, assistance with grant claims, company valuation, buying and selling businesses.

In addition, David is a Non-Executive Director for J&D Wilkie Limited, a privately owned global textile manufacturing company, and Henderson Loggie Financial Services Limited.

Fiona Morgan

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Fiona works with a variety of owner managed businesses and charities, both large and small, advising them on accounting, taxation and business improvement. Fiona is also responsible for the provision of the audit service within Aberdeen office.

Fiona’s clients operate in numerous sectors including food & drink, tourism, manufacturing, oil & gas service, professional services, retail, property development and recruitment. Working with them from inception through all the crucial phases in the development of a business, she has a personal approach which ensures that she can provide advice and re-assurance when it’s most needed.

Using her experience with Mindshop International, Fiona helps clients develop their businesses through business improvement services, specifically strategic planning, sustainable competitive advantage, family business issues, leadership development, personal development, and lean management..

Greig Rowand

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Greig has specialised in corporate finance and forensic accounting for over 25 years with senior positions within a Big 4 firm and then a specialist niche practice prior to joining Henderson Loggie in 2003.

He leads the forensic accounting team working with litigation lawyers and Counsel on all aspects of civil litigation and fraud related criminal proceedings where expert accounting input is required. He has given expert witness evidence in the Sheriff Court, High Court and Court of Session on complex and disputed financial matters.

Greig is a member of the corporate finance team taking business transactions from initiation to completion and focuses upon advising owner managed businesses on mergers and acquisitions, disposals, valuations and fund raising as well as reporting to banks, equity providers and acquisitive clients on financial due diligence investigations.

Greig is also a member of the Firm’s Professional Practice and Energy Sector Groups.

Jim Wilson

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Jim is Managing Director of MHA Henderson Loggie Financial Planning, responsible for the overall running of the financial services firm ensuring we offer our client’s pro–active advice in all areas of financial planning.

Jim acts as adviser to a portfolio of private clients and has a particular interest in assisting both companies and individuals with their pensions and personal investment planning both pre and post retirement. He also has a breadth of experience of the financial planning requirements across a broad range of corporate sectors advising on the constantly changing pension legislation and the impact this has on members of defined benefit pension schemes in particular.

Jim holds the Advanced Financial Planning Certificate and is the firms nominated compliance officer and pension transfer specialist.

Mark Hay

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Mark is a Manager in the Accounting & Business Solutions department, working with small and medium sized owner managed businesses, operating in a number of sectors such as food & drink, oil & gas service industry, manufacturing, property development, professional services, and retail.

Mark oversees the provision of various services to our clients including the preparation of statutory and management accounts, VAT returns and corporation tax returns. He is also responsible for other assignments including; incorporations, business planning and the preparation of cash flow projections.

Mark has experience in a variety of different accounting software packages including SAGE, KashFlow and FreeAgent.

Ricky Clark

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Having worked within the financial services industry since 2006, Ricky has gained valuable career experience within different roles in financial services companies.

At MHA Henderson Loggie Financial Planning Ricky specialises in pensions within the corporate sector, providing advice and project planning services on the new government regulations set out on workplace pension schemes, also known as auto enrolment. He also looks after the needs of a portfolio of personal clients assisting them with pre and post retirement financial planning requirements.

Stephen Bain

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Stephen is Finance & IT Partner at MHA Henderson Loggie and is responsible for accounting and tax requirements for a wide variety of SME businesses.

He is head of our Games & Digital Sector group, with a particular focus on start-up games companies.

Stephen specialises in Accounting Systems, using technology to ensure that businesses receive good quality Management Information.

He has acted as non-executive or interim Finance Director for a number of businesses and is vastly experienced in equivalent type roles.

Steve Cartwright

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With extensive experience of working with owner managed businesses, Steve’s main priority is working with clients to assist them in achieving their full potential in terms of growth and profitability, and maximising the value of their business. This includes strategic and business planning and business improvement, as well as risk and lean management, helping clients reduce costs and inefficiencies.

Steve leads the firm’s Creative & Interactive Media Sector Group. Steve has been working with independent video games developers in Scotland since the late 1980s and is supported by a team with significant knowledge of the sector.

Steve also leads Henderson Loggie’s Business Leaders Group. A group for Chief Executives and Managing Directors of owner managed businesses in Scotland. The group meets on a quarterly basis, giving members access to a wealth of business and continuous improvement tools and processes and networking opportunities both locally and globally, via our partnership with Mindshop International (a strategic leadership training organisation which operates globally).

As well as being a member of the Institute of Chartered Accountants of Scotland, Steve is currently the Vice Chairman of the Tayside branch of the Institute of Directors and is a one of the longest serving UK members of Mindshop International.