This continues the series of blogs reviewing legal market research.
For the fourth year, the NatWest Professional Services team has worked with accountant Robert Mowbray to produce a report looking at 390 law firms (employing 17,200 people and with a combined income of £1.43bn) in the SME sector (revenues below £35m) – including a comparison with accountancy firms.
The key points were as follows:
“The underlying climate is still positive, but there was a drop in confidence over firms’ ability to grow their revenue and profits…2015 was the second successive positive year for law firms with most measures of performance continuing to improve, albeit more slowly than in 2014”
Revenue
- Fee income was up by an average of 6% from 2014 (10% in London compared to just 4% in North East and North West)
- Over the last two years the average firm has seen a 5% improvement in revenue per fee-earner and a profit per equity partner improvement of 27%
- Recorded chargeable hours stuck firmly at 1,000 per fee-earner
- Median fees per fee-earner were £144,000 – with a lower quartile figure of £113,000 and upper quartile figure of £200,000 (A high of £184,000 in London and a low of £122,000 in the South West). An increase of 4% over last year
- The median fees per equity partner are £480,000
- Compared to accountants – solicitors generate 10% more fee income per equity partner and revenue generated per fee-earner is 5% higher for solicitors
- Predictions:
- 44% think fees will grow by 0-10% (25% in larger firms think income will grow by over 10% while it is 12% in small firms)
- 17% of large firms believe PEP will increase by at least 10%, compared to 8% in small firms
Profit
- Profit per equity partner up by 8%
- Median profit per equity partner is £111,000 – £4,000 higher than last year
- The median profit margin remained steady at 24% (settled at the long term average of 25%) – upper quartile is 33% and lower quartile at 15%. In London the median figure is 33%, in Scotland it’s 28% but in other regions it is 21%
- Average gearing is now 3.2X compared to 3.4X last year – reflecting the correlation between higher gearing and higher profits (compared to 3X in the accountancy sector).
- The percentage increase in profits over the last year is seven times greater than in large firms
- The increase in profits has been driven primarily by an increase in the price…hours recorded is flat
Pricing
- There’s an 8% improvement in average charge-out rates to £162 (“The recovered rate per hour has increased from £150 to £162 per hour”)
Other financial measures
- 4.4 billable hours per day for solicitors and accountants
- 109 days is the median lock-up period in 2015, up on 2014 (upper quartile 70 days and lower quartile 152 days, 82 days for small firms and 120 days for large firms and 135 for very large firms)
- Median bank balance was £54,000
- 37% of the firms were LLPs – roughly the same as those that are still partnerships
- Just 40% of firms felt that profit sharing was linked to partner performance
- Less profit is coming from interest on client accounts (median figure of just .27% of fee income)
The report indicates that the figures suggest there has been an improvement in productivity.
Maybe I am being simplistic but it seems to suggest that there is no real growth and that increases in income and profits have been achieved by increased prices. It worries me that there appears to be little in terms of real efficiency improvements and that short term cost-cutting measures may restrict future growth.
You can obtain the full report from here: http://www.nw-businesssense.com/law-report-2016.html
