Health check

All firms have a place on the profitability scale – but do you know how your firm compares to others on income, expenditure or profitability?

The Law Society of Scotland’s Financial Benchmarking Report 2018, published in association with Clydesdale Bank, shows a mostly improving picture for the Scottish legal market. Some firms will still be finding the market a tough place to do business, but it is encouraging to see indications of increased work volume generating higher revenues, although for some firms that work may appear to be less profitable. Data from the survey suggest, however, that firms have adjusted costs to manage the downturn in profitability.

Technology systems and services provider, Tribal, carried out the survey and has also analysed this year’s results alongside those from last year’s survey to gain an understanding of any trends within the legal profession. While it is acknowledged that different firms may have participated this year, it allows us to gain insight into the successes and challenges of firms in Scotland.

Widening gap

Overall there was an increase in the median profit per partner figure (before any salary drawings), up from £69,000 in the 2017 survey findings to £76,000 this year.

The differences between firms with fewer than 10 partners and those with more than 10 partners are stark when considering the median profit per partner results. Larger firms with 10+ partners showed a median profit per partner increase from last year of 38%, to £172,000. The results for the other sizes of firms were relatively static. It is interesting to consider why this may have occurred. It may be due to the firms who participated in the survey. Other factors may also be playing a part, including the lower impact of less profitable work for larger firms, or longer payment periods in larger firms.

Sue Carter, UK head of Professional Services Sector at Clydesdale Bank, suggests it may also be due to the larger firms having fewer partners than last year and, together with the fee-earning gearing ratio for the larger firms, suggests effective delegation of work.

Lower margins?

In general terms, firms of two to four partners appear to be in good health, showing good bank balances and low amounts of aged debt, despite a small drop in the median profit per partner figure (£79,000). Firms with five to nine partners also showed a slight drop in the median profit per partner (£94,000), and the survey findings indicate firms of this size face pressures from higher running costs without any significant benefits of economies of scale. The findings for sole-principal firms, which had a median profit per partner of £48,000, suggest that they are continuing to operate at the margins of commercial viability.

Profit margin percentage is an interesting result to consider. Some two to four, and five to nine-partner firms may be concerned by these results, as this segment of the market appears to show decreasing profit margins this year as compared to last year. This indicates that either their income is lower than expected or their expenditure and overheads are too large in comparison, making this a tough market share sector to be in.

Carter adds: “The net profit percentage remains a key indicator of how well firms are performing. While these sizes of firm witnessed an increased income per partner on last year, profit per partner remained relatively static, which suggests they have perhaps suffered most from increased overheads, including salaries. The most successful firms focus on profit.”

The results for participating firms show a slight decrease in median capital per partner for sole principals and 10+ partner firms. This compares with an increase in median capital per partner for two to four, and five to nine-partner firms. This result may require further consideration. It may be that the firms who hold the middle ground by size are requiring to invest more funds into their firms to cover immediate and longer-term financial commitments.

Planning aid

Carter commented: “The financial benchmarking survey findings will help firms gain a greater understanding of the legal market as a whole and assess where they sit in comparison to their peers. The data in the overall report is a useful tool in helping solicitors develop their strategic thinking and future planning, allowing them to assess what is working well and what may need to change within their business to boost performance.

“There are positive indicators in the report, including the overall increase in the median profit per partner figure. However the day-to-day challenges of generating new and profitable fee income, managing working capital and succession planning remain priorities.”

Thank you to all of the firms who took part in this year’s survey. Participating firms each receive their own confidential, interactive report enabling them to analyse trends for their firm, competitors and of the profession generally. We are encouraging all firms to take part in the next survey to increase participation, to allow even more robust comparative and trend data to be generated.

Financial Benchmarking Report 2018