Legal Practice Expenses Overview

Throughout 2019, most practices, on average, were able to reduce their overhead spend as a percentage of fee income. Only sole practitioners have seen  a significant increase in expenditure compared to income.

Premises

The cost of premises as a percentage of fee income was broadly consistent with 2018. It ranged from 5.6%-9.9% in 2019, compared to 5.5%-9.9% in 2018. The rental element of this cost ranged from 2.9%-7.3% in 2019 compared to 3.2%-6.3% in 2018. Sole practitioners demonstrated the largest increase in premises costs, increasing to 8.5% from 5.5% in 2018.

Annual rent reviews are more difficult to cover with smaller levels of fee income. The largest percentage costs remain for practices with more than 25 partners, generally preferring city centre  offices with higher rent and service charges.

IT

The range of spend on IT costs as a percentage of income narrowed slightly in 2019 to 1%-2.7% compared to 1%-3.3% in 2018. Firms of all sizes remain under pressure to keep up with the latest IT solutions to ensure they maintain secure and robust systems and also to enable staff to work more flexibly. The lack of significant increase in % spend on IT may be masking an overall reticence in investing for the future with changing working practices.

Marketing

The range  of marketing costs as a percentage of income between different practice sizes widened from 1.2%-2.5% in 2018 to 1.3%-3.2% in 2019. The largest increase in marketing spend as a percentage of fee income was seen in sole partner practices, where there has been an emphasis on growing fee income.

The range  of marketing costs as a percentage of income between different practice sizes widened from 1.2%-2.5% in 2018 to 1.3%-3.2% in 2019. The largest increase in marketing spend as a percentage of fee income was seen in sole partner practices, where there has been an emphasis on growing fee income.

Professional Indemnity Insurance (PII)

The reduction in spend on PII has continued in 2019 for the largest, over 25 partner practices. In 2019, the range as a percentage of fee income was 1.7%-5% compared to 2.4%-4.8% in 2018. Only the smallest, one partner practices and the 2-4 partner practices found PII increased as a percentage of fee income from 4.8% to 5% and 3.1% to 3.3% respectively. The higher risk is still perceived to be sole partner and 2-4 partner practices, which pay proportionately higher premiums than all other sizes of practice. The largest practices saw a proportionate reduction from 2.7% in 2018 to 1.7% in 2019.

Bad debts

In 2019, practices of all sizes saw a reduction in bad debts as a percentage of fee income. This year it has been the 5-10 partner firms which have been affected the most by bad debts, with 1.2% of fee income going bad. This equates to an average cost of nearly £50,000 or between £5,000 to £10,000 per equity partner. Debtor days also increased in this firm size indicating that there is a slow down in billing collection, possibly increasing the risk of a bad debt.

Non salary overheads

The general trend of expenses as a percentage of fee income was a reduction in 2019 across all practice sizes, except sole practitioners. As a percentage of fee income, non salary overheads range from 20.8%-29.3% in 2019, compared to 23.5%-34.8% in 2018. Sole practitioners saw their non salary overheads increase to 28.6% in 2019 compared to 23.5% in 2018.

Call to action

  1. Consider allowing employees to make use of modern IT solutions to work remotely, freeing up the need for larger office spaces and potentially reducing high rental and service charge costs.
  2. Review marketing costs against new wins and ensure that the marketing plan is focused in the right areas.
  3. Review the risk register and ensure that all risks are identified and properly mitigated in order to keep PII costs down.
  4. Continue to evolve online libraries to keep costs down and also to ensure all solicitors are using the same, up to date legislation.

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.