Profitability north and south of the border

In this referendum year, we thought it would be interesting to examine the relative financial performance reported by firms north and south of the border, and consider whether there are any major differences.

Chart 1 indicates median profits across the profession in Scotland of £63,700, as reported in the 2013 Cost of Time Survey of law firms in Scotland.

The Law Society of England & Wales (LSEW) does not produce a representative annual survey of its members. However, the Law Management Section (LMS), which is part of LSEW, does produce an annual survey for its members, the LMS Financial Benchmarking Survey. This survey is not representative of the profession south of the border, because by definition its membership comprises firms interested in management, but it does give an indication of the results of these better-run firms.

Chart 2 indicates an overall median profit per equity partner of £122,000. The size categories are not the same as in the Scottish survey. Interestingly, however, the larger firms with more than 10 partners are less profitable than their equivalents in Scotland.

The median profit of the profession generally in England & Wales will be lower than this; however it is difficult to know whether it is higher or lower than for firms in Scotland. The economy has been buoyant in recent months, with property strong in most regions, but competition is starting to increase from new market entrants. These of course can be 100% owned by non-lawyers, leading to very different types of business entering the legal market. For example, Brilliant Law is owned by the founder of BetFair, one of Europe’s largest online gambling organisations, and its directors include former directors of Sky TV and webuyanycar.com. Such organisations will provide strong competition for traditional firms of solicitors, in a market that was already very competitive.

In 2013, LSEW published a survey of firms that undertook criminal work, Price Competitive Tendering for Criminal Defence Services 2013. The MOJ had proposed cuts in fees and the introduction of price competitive tendering, and the Law Society wished to provide evidence of the financial position of these firms. The survey was based on 121 crime firms, so was a reasonable sample, and indicated median profits per partner of £70,000 as shown in the table. In this survey, firms are categorised by number of solicitors because categorisation by number of partners would not have been especially meaningful, as most had fewer than four partners.

If legal aid firms were able to achieve these levels of profit, it is likely that the profitability of firms generally was higher, so it is likely that the profitability of firms overall will be higher south of the border than north.

RBS published a Financial Benchmarking Report – Law Firms in 2013, based on information relating to its customers. This survey indicated median profit per equity partner of £222,000 in London, £71,000 in the south east, £70,000 in the south west, £74,000 in Wales, the Midlands and East of England, and £108,000 in the north. The median profit for firms in Scotland in that survey was £90,000.

Both the Scottish and LMS surveys analyse the characteristics of the most and least profitable firms. There are some similarities and differences between the two. In both surveys, relatively few 10+ partner firms took part, so we will concentrate on the firms with fewer than 10 partners.

Chart 3 shows that the most profitable firms in Scotland with less than 10 partners had two or three fee earners per equity partner. Gearing was much higher for smaller firms south of the border, as shown in Chart 4. This may go some way to explaining the higher levels of profits indicated above.

Chart 5 illustrates fees per equity partner in Scotland and indicates fees of £300,000-£400,000 for the more successful smaller firms.

Chart 6 indicates generally higher fees per equity partner south of the border.