Law Firm Practice Expenses
Throughout 2018, the overhead expenses as a percentage of income remained broadly consistent with the previous year. Only the largest practices have seen a significant increase in expenditure compared to income.
Premises costs as a percentage of fee income was broadly consistent with 2017. It ranged from 5.5% – 9.9% in 2018, compared to 5.9% – 9.3% in 2017. The rental element of this cost ranged from 3.2% – 6.3% in 2018 compared to 3.3% – 6% in 2017. Sole practitioners demonstrated the largest decrease in premises costs, reducing to 5.5% from 7% in 2017. The largest percentage costs remain for practices with in excess of 25 partners, generally preferring city centre offices with higher rent and service charges.
The range of spend on IT costs as a percentage of income widened in 2018 to 1% – 3.3% compared to 1.6% -2.2% in 2017. The larger practices, 11-25 and over 25 partner practices increased their investment in IT to 2.7% and 3.3% respectively from 2.2% in 2017. Given the speed of growth in technology, it seems likely that all sizes of practice will remain under pressure to increase this spending to maintain secure and robust systems.
The range of marketing costs as a percentage of income between different practice sizes narrowed from 0.4% – 2.9% in 2017 to 1.2% – 2.5% in 2018. There are increases in the proportionate marketing spend during 2018 amongst sole practitioner, 2-4 and over 25 partner practices, as firms increased the emphasis on growing fee income.
Professional Indemnity Insurance
The reduction in spend on Professional Indemnity Insurance (PII) has continued in 2018 for the smaller sole practitioner, 2-4 and 5-10 partner practices. In 2018, the range as a percentage of fee income was 2.4% – 4.8% compared to 2.1% – 5.5% in 2017. Only the largest, over 25 partner practices found PII increase as a percentage of fee income to 2.7% from 2.1%. The higher risk is still perceived to be one partner practices, which pay a proportionately higher premium than all other sizes of practice.
Books and Library
There is a relatively modest spend in this cost category, but it remains a necessary cost as legal practices need to maintain a reference library to keep up to date with legislation changes. The cost as a percentage of fee income in 2018 ranged from 0.2% – 1.1% compared to 0.4% – 1.4% in 2017. Practices continue to take advantage of online solutions, which prove to be the most cost efficient.
2018 has continued the trend of the previous three years, that 2-4 partner practices are suffering the highest proportionate cost of bad debt. This has risen in 2018 to 3.3% from 3.2% of income, which equates to an average cost in 2-4 partner practices of nearly £40,000 or £16,000 per equity partner. This is likely to be due to not having a dedicated credit control function and a high proportion of partner time being chargeable.
Non Salary Overheads
The general trend of expenses as a percentage of fee income remained consistent in 2018 across all practice sizes, except sole practitioners. As a percentage of fee income, non salary overheads, range from 28.6% – 34.8% in 2018, compared to 29.8% – 33.8% in 2017. The outlier was one partner practices who reduced their non salary overheads to 23.5% in 2018 compared to 33% in 2017. This cost reduction fed straight to the bottom line with a significant increase in profitability.
- Restrict premises costs by considering hot desking, open plan shared areas and rearranging the work environment to fit in smaller modern work spaces.
- Consider allowing staff to work from home some of their working week to free up space.
- Set a marketing plan with a strict budget and track spend to new work wins.
- Review risk registers to see if you can reduce overall risk that will impact on lower PII premiums.
- Centralise the control of spend on library to stop duplication of ordering books, and move online where possible.
- Designate some of the finance function time to
- credit control activity, with monthly targets for
- fee earning staff on cash collection where they
- have an ongoing client relationship.
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.