Employment Costs Spotlight for Legal Practices
Salaries controlled, but not profit
Last year the headline was “Costs back under control”, however, that trend has not continued.
Profit is sanity
Increases in wage costs, particularly for fee earners may not be a bad thing if the cost is matched by an equivalent increase in charging rate, which is recovered from the client through better billing. Every £1 charged should have an element of profit, so increasing salaries of fee earners should lead to an increase in profits!
However, the converse applies. Wage costs with no increase in revenue equals lower profit. Even worse, wage costs stay static, but fees reduce. That is why we assess salary as a proportion of income. A 72% proportion of salaries to fees (as seen in 1 partner firms), leaves only 28% available for all other overheads and proprietor profit. For most firms, that is an unsustainable level.
Fee earner salaries controlled
The table of average fee earner spend is very noteworthy. This table shows two things. Firstly, there is no obvious loss of control of fee earner salaries, and secondly, there is a tightening of the spread of salaries over the sizes of firms.
To only have a £5,000 spread over the whole average in 2019 is quite remarkable.
11-25 partner firms are not far behind, with a trendline that is even more significantly upward, Those firms need to look to reverse this trend. Our report suggests that this worsening is due to the fall in revenue per fee earner (which is covered in the section on income) but with a general national increase in wages, in 2020 it is likely to become more than just a revenue issue.
Firms with 2-4 partners seem to have had their rise last year and have brought things under more control, but there is still a way to go. Whilst it has levelled off for 5-10 partner firms, the mid-tier firms have had this under control for some time and, at 56%, they are much healthier.
Ratio of fee earners to the whole firm
The other area worth considering is how the proportion of fee earners to the rest of the firm is moving.
As ever, the larger firms score well in this category, but every single size of firm shows an improvement. For years, support teams have become increasingly chargeable, but is this now enhanced by using better and/or more intelligent computer systems. Given the movement in other factors, it is key that this trend continues.
2020 is going to be an important year for most law firms as they balance salary cost against revenue. No law firm will want to lose quality people, and a good area to start making improvements is to implement flexible working which can produce positive results for the firm, not just the employees.
Call to Action
- Review overall employment cost reduction through payroll management such as salary sacrifice.
- Consider flexible working and employee wellbeing schemes which may offer a solution to the law firm as well as its people.
- Consider the improving trend of reducing the number of non-chargeable staff.
- Make sure that your costing systems to generate fees fully include the complete costs of employing your staff.
Find out more
This article comes from our latest Legal Benchmarking Report. This annual report draws insight from legal practices across the UK and focuses on some of the pertinent issues and trends in income, profitability, employment costs and lock up
Click here to read a copy of the full report.