In October, NatWest Bank produced a free law firm financial benchmarking report on the profits being made by law firms outside the UK’s top 100. It shows that law firms with profits below £25m are struggling to turn fees into real profit.

The report, authored by well-known law firm finance expert Robert Mowbray, uses data to the year end of 2012 from 337 firms employing a total of 15,200 people and generating £1.05 billion income (£247 million profits). For the record, a firm is considered small if income is below £1.5m and medium-sized with income up to £27m.

The main findings were as follows:

  • Profit per Equity Partner (PEP) varies from £11,000 to £459,000 but the median figure was just £59,000 for small firms – exactly half that of larger firms at £118,000. Across all firms analysed the median was £90,000. Assuming average partner salaries are £80,000 – this indicates that profits are low.
  • One of the key drivers of profitability was gearing – in small firms it was two while in large firms it was four.
  • Fees per Equity partner median figure was £393,000 – 2% increase on the previous year
  • Fees per fee-earner median of £132,00 but there were significant regional differences (London £217,000, North £155,000 and combined figure for Wales, Midlands and East of England was lowest at £112,000)
  • Median total lock up was 104 days, but there was again regional variation. The range was 46 to 184 days.
  • Less than half the current head count generates fees
  • Profit as a percentage of fees held at around 23% – although there was wide variation with figures spanning 5% to 54%

The free report is available here:  . It contains a list of questions for firms to consider to improve their profitability. Traditional calculations are described (e.g. Gearing X Hours X Recovered Rate/Hour X Profit Margin = PEP). There are some good (albeit common sense) tips about teams to allow delegation, capturing all time, investment in IT.

There was a nice quote about business development “Achieving a multiple of fees which is higher than three times salary costs will not be achieved with peaks and troughs in the work flow. Partners must therefore look ahead, even when they are busy, and start to do the necessary business development work to make sure that future troughs are filled before they become real”.