Law Firm Employment Costs

Across the board, total employment costs have either reduced or remained broadly consistent with last year. At first glance, this would appear unexpected as, all else being equal, the effects of inflation and auto-enrolment pensions were predicted to push costs up. The key lies in the staff mix and total workforce, which paint varying pictures across firms of different sizes this year.

Costs Back Under Control

The decrease was driven by a large rise in fee income (12.3%) despite salary costs remaining at last year’s levels, showing that sole practitioners have managed to generate more income from the same cost base. Marginal reductions in the average numbers of both fee earners and total staff prove that sole practitioners have achieved the extra fees with fewer chargeable hours available, and indicates a good year in general. This is confirmed with an average underlying profit more than double that of last year.

Employment Costs

Struggle to Convert Chargeable Time

In contrast to sole practitioners, firms of 2-4 partners saw a rise in salary costs as a percentage of fee income, continuing a 5-year trend. In 2014, the costs were only 56% of fee income, whereas they are now an average of 70%. The problem appears to be a struggle to convert chargeable time into fees, as income reduced by 1.7% despite an increase in the number of Fee Earners and therefore available chargeable time.

More for Less

Firms of 5-10 partners saw a reduction in total staff numbers, an increase in Fee Earners as a percentage of total employees, and a corresponding reduction in average numbers of support staff, all of which were observed in the 2-4 partner bracket as well. A crucial difference, however, is that the larger firms enjoyed an increase in fee income of 9.3%, which brought the percentage of salary costs down to 55.4% from 60.2%. Firms of this size also appear to have been more productive per Fee Earner, managing to bill more fees with a smaller Fee Earning (and total) workforce.

Mind the Gap

Larger firms of 11-25 partners have also seen a reduction in total employment costs as a percentage of fee income (from 66.2% to 64.3%), as a result of both a decrease in total salary costs (2.8%) and a marginal increase in fee income. Total staff numbers remained the same, but an increase in fee earners as a percentage of total staff, coupled with the reduction in total costs, indicates that the fee earning workforce is now more heavily weighted towards lower paid members of staff.

Too Much Support?

The staffing mix in the largest firms has become yet more heavily weighted towards support staff, who now account for nearly half of the total workforce, rising from 42% last year and 39% two years ago. This indicates that more of the work of the largest firms is now being undertaken by support staff, perhaps made possible through standardising processes. The total workforce has also increased sizeably, by 15.3%. However, these largest firms have not managed to convert their extra available time into fees, as income dropped for the second consecutive year.

Key Considerations:

  • Review the matter types that the firm completes, and how you might use lower grades of staff to complete some of that work.
  • Review “who is doing what” to check that senior fee earners are not completing work that could be done by more junior staff.
  • Check that fee earners are not completing “admin” tasks.
  • Staff bonus schemes should be driven by
  • financial results.

This article featured in our 2019 Legal Benchmarking Report. Download the full report here: 2019 Legal Benchmarking Report

If you would like to discuss any of the issues raised in more detail or if you would like to speak with a member of our team, please contact Hannah Farmboroughor call on 0207 429 4147 to be put in contact with a member of our Professional Practices team