Income spotlight for legal practices
The results of our 2019 review highlight trends being seen across the legal sector and key strategies being implemented consistently by many firms.
Growing fee income trend
In 4 of the 5 size categories, total fee income has grown compared to 2018.
Sole trader practices and 5-10 partner firms saw modest growth in fee income of 2.9% and 1.7% respectively. The larger practices, with 11-25 partners achieved 12% income growth, while firms with more than 25 partners saw significant income growth of 22.4%.
Only 2-4 partner firms on average continued their trend in recent years of falling income.
Increasing numbers of fee earners and partners
Income growth was mirrored by growth, on the whole, in numbers of fee earners, partners and equity partners, as summarised in the above table.
A key question posed in our 2019 review was whether firms were too lean to grow. During the past year, increases in fee earner and equity partner numbers have built capacity for growth.
Our review highlights the trend of senior fee earning employees moving up to partnership and partners moving up to equity partner status. Correspondingly, fee earner numbers have risen. This increase is at a more junior level, with these staff not as qualified, experienced and not as highly remunerated.
Promoting senior fee earners to partnership is a defensive strategy for the retention of good people and reflects the current, very difficult recruitment market. Bringing in more fee earners at lower levels is a strategy for growth in the medium term.
Income per fee earner – falling ratio
The short-term consequence of these strategies is a fall in income per fee earner. The more junior fee earners have lower fee targets and are not generating the same levels of income as their more senior colleagues.
Income per fee earner for sole trader practices of £121,000 was down 19.3%; for 5-10 partner firms £149,000 was down 12.3%; 11-25 partners of £122,000 was a fall of 14.1%; and more than 25 partner firms figure of £134,000 was a drop of 5.6% compared to 2018. 2-4 partner firms saw an increase in income per fee earner of 6.6% compared to 2018, but the 2019 figure of £129,000 remained below the income levels of earlier years i.e. 2013 through to 2017.
For all three size categories showing increased equity partner numbers (2-4 partner; 11-25 partner; and more than 25 partner firms), there has been a respective drop in the income per equity partner ratio, as the total firm income is shared across more equity partners.
A cautionary note for sole trader practices and 5-10 partner firms: These firms have experienced growth in income whilst encountering significant falls in the income per fee earner ratio. Fee growth has been achieved through equity partners stepping in to fill gaps and while that may maintain current profitability, it will not be sustainable in the long term.
Call to action
- Growth in income per fee earner is key to creating improved, sustainable profitability, which will only come from building the capabilities of more junior fee earners.
- With senior staff promotions to partnership, consider what leadership development and mentoring is in place for their continued progress.
- Consider agile and remote working policies as part of your recruitment and retention strategies and how they will interconnect with plans to grow your fee income per fee earner.
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.