Financial benchmarking: Law firms reveal the results of annual 'health check'

13 May 2010

A Law Society survey has revealed that legal practices are showing little sign of confidence over growth prospects in 2010 with the average growth prediction at 0 per cent.

The key findings in the Law Society Law Management Section's annual profitibility survey, sponsored by Lloyds TSB Commercial, reveal the financial health of law firms as they emerge from the economic downturn and prepare themselves for the impact of the Legal Services Act over the next eighteen months.

Now in its tenth year the survey, produced in association with Hazlewoods LLP, a medium sized, niche accountancy practice specialising in advising the legal profession, is widely regarded as the annual health check report for the smaller end of the legal profession. The survey provides participating law firms with a clear understanding of their cost base and their main profitibility drivers. It focused on three basic performance measures; income levels, profit, and working capital.

The survey reveals a fall in fee income levels in 2009 compared to 2008 across the board, comfirming that last year has been the most challenging year for solicitors in recent times. Specialisms such as conveyaning ceased being profitable for many practices which led to slimmed down business models, a decrease in practice fee income and an increase in redundancies.

Recessionary effects are most obvious in the median net profit per equity partner, which decreased from £114,078 in 2008 to £86,960 in 2009, a 24% reduction.

The data also reveals that practices have not been able to, or not wished to decrease the number of fee earners at the same level as their drop in income, suggesting that many have taken a longer term view, learning from the last recession in the early 90's and remembering that the ability to recruit is will harden as the economic conditions improve.

The Law Management Section of the Law Society, a membership association designed to assist those in the management of legal practices, invited members to complete the annual financial benchmarking survey questionnaire and to provide two years data, allowing a direct comparison of both year's results on a like for like basis.

Key headlines:

• Median practice fee income in 2009 decreased by 6.5% compared to 2008.
• The 185 participants reported total redundancy costs of £4,033,542 paid to 1,039 people. Approximately 9% of the reported workforce.
• The median cost of a fee earner was £48,669 compared to £44,658 in 2008, an increase of 9%.
• The number of support staff per fee earner decreased from 0.77 in 2008 to 0.72 this year, an average saving per fee earner of £1,022.

The responses, which were received by the end of December 2009 highlight that short term working was adopted my many firms while pay increases were rare. The average professional indemnity cost per pound of fee income increased from 2.2% in 2008 to 2.7% in 2009.

The survey helps firms plan for future financial objectives; big profit increases require detailed understanding of financial performance. Benchmarking against other firms helps firms face up to the challenges of the new legal services environment, and consider the benefits of external investment.

Law Society President Robert Heslett said; "The Law Society annual LMS Financial Benchmarking Survey helps law firms budget and plan for the future. It is particularly relevant for smaller firms. Benchmarking helps firms face up to the challenges of the current market and the new legal services environment by assessing performance against peers, preparing for the shifting economic realities, and considering the benefits of external investment.