The Law Management Section’s 2012 Financial Benchmarking Survey report shows that, despite the ongoing challenging economic and market conditions, the situation for law firms continues to improve.
Andy Harris – director in the legal team at chartered accountants Hazlewoods LLP – comments:
This is the fourth year that we have produced the Financial Benchmarking Survey for the Law Management Section. Now in its 13th year, the Survey is sponsored by Lloyds TSB Commercial. This year, the survey was opened up to the whole profession, and the submission deadline was brought forward to allow us to produce the report much earlier than in previous years. Despite the earlier deadline, almost 170 practices took part, making it one of the biggest of its kind in the UK. As in previous years, participants provided two years’ data – the most recent accounting period and the previous one – allowing us to compare results on a like-for-like basis.
Here are a few brief headlines:
- median practice fee income increased by 3.6% compared to 2011, following a 1% increase last year, and a 0.2% increase the year before;
- median fee income per equity partner was £559,000;
- interest receivable increased by 20% – an average of almost £2,600 per partner – as the amounts of client money held continue to increase, and banks are beginning to pay improved rates of interest on client monies;
- the ratio of fee-earners to equity partners increased slightly, up to just under five to one;
- the median cost of an employed fee-earner (including fixed share partners) increased slightly to £40,860;
- total lock-up (work-in-progress and debtors combined) remained very similar to 2011, at 159 days;
- median profit per equity partner increased by 3.6% to £120,677, following the trend in both 2011 and 2010, with increases across the board for all but the largest and smallest practices in the survey – for some practices, profits are as high as they were four or five years ago.
The increase in profitability has resulted from a combination of increased income and continued control over spending. Greater numbers of practices have also begun outsourcing their key functions.
Continuing the positive trend, in this year’s survey, we asked practices for their fee predictions for 2013. Overall, the responses were fairly positive, with a median expected fee growth of 3.4%. Given the uncertainty coming from alternative business structures (ABSs) and other legislative changes, this is pleasing.
We also asked participants for their thoughts on their own future over the next few years, particularly following the introduction of ABSs and external investment in practices at the beginning of last year. A third of practices told us that they were likely to merge with another practice within the next two to three years, and a similar number were already speaking to other practices.
This certainly ties in with our own experiences – we are currently assisting more practices with mergers, demergers and hiving off parts of their practices than ever before.
Finally, one in five practices thought it likely that they would seek external investment for expansion, and a similar number said that they were likely to bring in one or more non-lawyer owners, such as HR, IT or finance partners, or partners' spouses.
The LMS Financial Benchmarking Survey 2012, produced by Hazlewoods and sponsored by Lloyds TSB Commercial, is available to Section members now, at the special price of £75, or to non-members at £150. Survey participants receive a copy free of charge, plus a personalised report, comparing their results against all other participants. To buy your copy, visit the Section website.
Banking on success
Chris Marston, Head of Professional Practices at Lloyds TSB Commercial, reflects on the 2012 survey results
This year’s survey results demonstrate once again the remarkable resilience of the solicitors profession. In difficult economic conditions, it’s really impressive to see median income grow by 3.6%, and a similar percentage growth in median profit per equity partner. But the measure I like best is the profit after deducting a realistic notional partner salary, and notional interest on partners’ capital. The resulting ‘super profit’ (or, to be blunt, real profit) has grown to almost 8% of fee income, from last year’s 4.5%.
Partners tend to have three roles in their business – as investors, managers and practitioners – and the challenge is to do justice to each role. This important annual survey provides detailed and valuable data to allow them to look at their firm’s financial performance objectively and make the right investment and management decisions. Without those, it really doesn’t matter how great a practitioner you are.
Note: – This article was first published in the February 2013 edition of Managing for Success, the quarterly magazine of the Law Society’s Law Management Section www.lawsociety.org.uk/lawmanagement