Law Firms Income
Consolidate or Grow?
The results of our survey this year reflect what we see and hear when we meet our clients. Half of business leaders in the legal sector see their current strategy as one of growth, while the other half see now, as a period of consolidation. Whichever strategy has been followed, we have seen a renewed focus on improving profitability.
Fee Income Trends – A Mixed Bag
Growth in fee income has been achieved by sole trader practices (12%) and 5-10 partner firms (9%), with mid-tier practices of 11-25 partners seeing minor growth at 0.1%. Whereas, the larger firms of more than 25 partners and smaller practices of 2-4 partners saw falling income of 3% and 2% respectively. The summary of changes in fee income levels across the different size categories of firms was mirrored by the changes in income per fee earner. There was growth for sole trader practices and 5-10 partner firms of 10% and 0.6% respectively, while the mid-tier firms saw a minor drop of 1%. Firms with 2-4 partners and the larger practices both saw more substantial falls of 12%.
Across the board there has been a drop in the number of fee earners as a ratio to equity partners. This has been impacted by a series of promotions of senior fee earners up to partner level, as a strategy to retain key staff. As opportunities present themselves in 2019, it may be many firms find it very challenging to take on board too much growth too quickly, as the systems, people and structures are not ready to scale up. It has also resulted in different outcomes for income per equity partner depending on the firms’ size.
Different Trends Depending on Size
Significantly, the changes compared to last year in the income per equity partner ratio, show diverging trends. The smaller practices of 10 partners or less all highlight increases in income per equity partner, with a 2% increase for partnerships of 5-10; 5% for 2-4 partner firms; and 12% for sole traders. However, the mid-tier firms have a fall of 13%, while the large firms show a drop in income per equity partner of 10%, as their overall number of partners grows by promoting existing staff, without replacing them with new fee earners.
Specific Strategies to Suit the Situation
Deeper analysis of these trends highlights firms having different focuses depending on their size. Smaller practices of 10 partners or less have been tightening their belts, ensuring they have the right people on the pitch, but where there have been skills or capacity gaps, the equity partners have had to step in to do more. While this has led to short term improvements in profitability, it is not sustainable in the long term. The income and profitability trends of the larger practices of 11 partners or more, are indicative of bedding in the acquisitions and mergers of recent years, in advance of seeing the longer-term benefits flowing through from wider service offerings to the client base. As the leaders of all legal firms look forward to the rest of 2019 and beyond, they must ask themselves whether their strategies have been framed for the future and ensure they are not too lean to grow.
- Review your recruitment strategy to make sure you have long term succession plans in mind.
- Create a strategy for recruitment and retention of key staff, focusing on leadership development and building a strong culture for the firm.
- Improve your training and supervision of staff to get best chargeable use of their time. Setting tighter billing and chargeable hours targets.
- Agree detailed scope and fee quotations with clients to avoid wasted unbillable time.
- Look at technology and AI to drive efficiencies
- and reinvent the business.
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.