Law firm analysis – MHA Legal Benchmarking Annual Report 2020Posted on: January 14, 2021
I regularly scan for research reports that can be used by professional service firms (lawyers, accountants and surveyors) when conducting their business analysis and business, financial and marketing planning. I share summaries of key reports to assist firms with their planning. The MHA Legal Benchmarking Annual Report 2020 (8th) covers 2019 so no doubt there will be significant differences when the next report is released reflecting the impact of the Coronavirus during 2020.
Main findings of MHA Legal Benchmarking Annual Report 2020
- Income – Many legal practices saw increased demand for services during 2019
- 3% increase in billing (2-4 partner firms)
- 12% increase in fees billed (11 -25 partner firms)
- 22% increase in fees (25+ partner firms)
- Profit – Apart from the smallest practices, Profit per Equity Partner (PEP) is improving – overhead control is one factor but the main driver is that the ratio of fee earners to partners has increased. The increase in fee-earners is not translating directly into higher profits – so there is an investment period for many firms.
- 2% profit reduction in one partner firms
- 4% increase in net profit (2 – 4 partner firms)
- £14K increase in PEP (2 – 4 partner firms)
- £4K reduction in PEP (11 – 25 partner firms)
- £23K increase in PEP (25+ partner firms)
- 12% reduction in income per fee-earner (5 – 10 partner firms)
- 14% reduction in income per fee-earner (11 – 25 partner firms)
- Headcount – The number of partners and fee-earners both increased – and trainee recruitment is up. There is a trend for assistants to move from full support to completing part of the service for clients.
- 14% increase in fee-earning staff (one partner firms)
- 10% increase in fee-earning staff (5 – 10 partner firms)
- Cash flow and Funding – Improvements in lock up are balanced by a reduction in the amount of partner funds held in the practice. Senior fee-earners are being promoted to partner to support succession and not always asked to contribute to personal funding of the practice. Bank funding has increased.
- £8k down equity partner capital investment (one partner firms)
- Equity Partner capital down by £55K (25+ partner firms)
- £27K bank borrowing increased (one partner firm)
- Lock up improved £100K (2 – 4 partner firms)
- Lock up worsened by £143K (5 – 10 partner firms)
- Consolidation continues with the most popular size of practice to merge being those with between two and 10 partners
What drives profitability?
The report notes the divide between the size of practice and PEP – bigger is better for profitability.
- For 1 – 4 equity partner (EP) firms Average Annual Profit (AAP) for the last two years was £86,000
- Whereas for practices with 5 – 25 EPs the figure is £147,000
- Those with more than 25 EPs the figure is £244,000
The report considers the drivers of profitability:
- Value work properly – Standard net profit benchmark is to aim for 25% or more (only firms with 11 or more partners achieve this)
- Bill quickly – Old time is less profitable so fee notes should be issued when the job completes
- Assess which work is profitable – Analyse data to see what matters are profitable and adjust marketing accordingly
Employment costs are highlighted as important for profitability. The report notes a general fall in revenue per fee-earner but with a general national increase in wages. The proportion of fee-earners to the rest of the firm is another important metric (there are helpful tables in the report).
The cost of premises as a percentage of income was broadly consistent with 2018 – ranging from 5.6% to 9.9% in 2019 compared to 3.2% to 6.3% in 2018.
The range of spend on IT costs as a percentage of income narrowed in 2019 to 1% – 2.7% compared to 1% – 3.3% in 2018.
The range of marketing costs as a percentage of income widened from 1.2% – 2.5% in 2018 to 1.3% to 3.2% in 2019.
Lock up varies from 63 days for sole practitioners to 110 days for 2 – 4 partner firms to 142 days for 5 – 10 partner firms.
The full 24 page report can be viewed here: MHA-Benchmarking-Report-2020.pdf (carpenterbox.com)
Other benchmarking reports
Real estate costs in law firms | Kim Tasso (October 2015)
Law firm financial benchmarking from NatWest | Kim Tasso (November 2013)
Relevant short videos
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KAM basics – Client portfolio management with dinosaurs https://youtu.be/ORlnsuXGLaI 4 mins (October 2020)
Sales basics – Targeting with rabbits, deer and elephants https://youtu.be/_tLmv3hU7M4 7 mins (August 2020)