Law Firm Profitability
The positive news this year is that there has been a marked improvement in profit per equity partner (PEP) for every category of firm we benchmark, other than 11-25 partner firms where the PEP showed a small 3% fall on the previous year.
Positive Profit Improvements on Prior Year
PEP is such an important statistic and it is what the partners work hard to achieve. The PEP for each of the firm categories has increased year on year in excess of £15,000 per partner. This is not insignificant and is welcome following the prior year results where profits had been impacted by a hard market and increased wage demands by staff.
Still Tough for the Smaller Practices
Average PEP for sole practitioner firms has exceeded the PEP of 2-4 partner firms for the first time since our benchmarking report started, 7 years ago. With PEP sitting at an average £80,000 for 2-4 partner practices, this is some £60,000 less than the average for 5-10 partner firms and you have to question whether the highest non-partner fee earner will be being paid similar levels to that of an equity partner who has capital invested in the business and all the risks of ownership that go with it.
Larger Firms Continue to Invest in Ownership Changes
The stalling of the PEP for 11-25 partner firms seems to correlate with what appears to be a continued investment in new equity partners. When this happens there tends to be a period of profit investment by the existing equity partners as the new equity partner grows into the role, increasing their own fee earning over time.
Work Harder or Smarter
It is easy to increase fees by selling your services at too low a fee level, but you will not make any profit by doing so. The firm should concentrate on the types of matters which earn the most profit. A firm making a reasonable return for the work they are doing would be generating net profit at a level of 25% or more and it is only the greater than 11 partner firms who appear to be achieving that, with 2-4 partner firms struggling at 16% and 5-10 partner firms at 18%.
Is Bigger Better?
The profit gap between the larger firms and the smaller practices continues to be very evident, with the PEP of larger firms being significantly
higher than smaller firms. 11-25 partner firms have a PEP which is double that of 2-4 partner firms.
It is not a surprise that the larger firms continue to consolidate the smaller firms and that seems set to continue. There is still room in the marketplace for small boutique specialists, who are driving up the profit margins in smaller firms.
- Review recoverability on work delivered to analyse where profits are being made.
- Are you selling services too cheaply or delivering too slowly?
- Can you review work pricing to improve profit?
- Review processes to see where you could streamline and save time.
- Do your staff need training so they can deliver what your client wants in a faster way?
- Are you using IT to save other time costs?
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.