The annual NatWest Legal Benchmarking Report consolidates the financial performance of 269 legal firms covering the financial year ending 2016 and also reviews the actual performance predicted by firms in late 2015. By focusing on firms operating at the SME level across England, Wales and Scotland, they’re able to compare their financial performance against those of local and national peers. In many cases, the report has helped promote further business focus and encouraged firms to incorporate new processes that drive improved performance.
Economically, 2015 and the majority of 2016 were positive years with high levels of consumer and business confidence, certainly pre-Brexit. The financial performance of SME sized legal firms is usually closely aligned to that of the economy and as such average revenue growth of 5% is not a surprise. The combined average growth rate over the last two years at 11% is very positive when compared to many other industries.
Revenue growth by volume has facilitated an improvement in profit for the owners of legal firms and in 2016 the average profit per equity partner (PEP) was £120,000. Year on year, PEP has improved and the 2016 performance is 33% up from 2013.
So once again the business climate for legal firms has been positive and generally firms are in good financial shape.
The findings found in the Legal Benchmarking report are based on historic financial data and therefore give a rear-view perspective on the sector which may not be entirely relevant moving forward given the potential headwinds predicted for the domestic and global economy in 2017 and beyond.
Indeed, the Law Consultancy Network half year survey recently identified that the top three issues for legal firms in 2017 would be cashflow, Brexit / global political uncertainty and improving profitability.
This report highlights some obvious areas of focus and opportunity for legal firms if revenue growth does not continue at the pace witnessed in recent years. Efficiency has to be an area worthy of more attention. Much of the recent revenue improvement has been accommodated by an increased workforce as can be seen through the increased gearing number but in turn this has reduced fee earner efficiency with the majority generating just 3.9 hours of daily billable time with the actual net profit (before drawings) position reducing back to 23%.
It’s always wiser for firms to focus on their cash position but in recent months this has become even more prevalent. If we are entering a period where the economic waters will get a little choppy then it is those firms that manage their cash who will be best placed to sail through the storm.
Firms should look to reduce their lock-up which at an average of 113 days is now longer than at any time in the last 5 years. Without a constant flow of new matter starts and paid fees they would, on average, run out of cash within 40 days, possibly something worth thinking about before all the cash is distributed in the form of partner’s profits.
A further area of risk for legal firms comes in the form of cyber attacks. Our findings suggest that one in four of all legal firms have been the subject of a criminal attack and some of them would have incurred a financial loss and potentially reputational damage. There is huge pressure on firms to be ever more diligent and to ensure that they have a disaster recovery plan in place.
Working closely with our report’s co-author, Robert Mowbray, and to maximise its practical experience and wealth of knowledge, we have included a new section “Improving productivity – the best way to improve profitability”. It provides a simple diagnostic tool to enable you to identify what areas of performance improvement will have the greatest impact.
At NatWest, we remain committed to supporting legal firms in developing a successful and sustainable business. Our specialist relationship directors understand the professional services sector and benefit from accredited training and regular sector updates. To download the 2017 NatWest Legal Benchmarking Report, please visit www.rbs.com
The survey is a substantial review of law firms with fee income of up to £123m. 269 firms employing 16,000 people took part in the survey from across England, Wales and Scotland. The total income of the firms in the survey was £1.42bn.
• The median profit per equity partner (PEP) is £120,000 which is £9,000 higher than the figure reported in the survey last year.
• The median profit per equity partner in small firms of £75,000 is less than half of the median figure in large firms being £164,000.
• The median profit margin dropped to 23% which shows that the growth in profit per equity partner is coming from an increase in volume which has more than offset the drop in efficiency. Firms need to focus more on delivering better margins.
• Median fees per fee earner were £136,000 which was down from £144,000 in the previous year and demonstrates a significant drop in productivity.
• The median fees per equity partner is £539,000 with the lower quartile point being £340,000 and the upper quartile point being at £858,000. This is a significant increase on last year.
• Fees have grown by 5% compared with a 6% increase last year which is still considerably above inflation. There is some regional variation with the South East achieving 9% growth while the North East & North West declined by 1%.
• Law firms remain cautious about carrying debt and the median bank balance was £94,000.
• The spare capacity in the overdraft has a median figure of 11% of annual fees with little variance in this number for different sizes of firm. This suggests that the median firm would run out of money in about 40 days if they received no further money from clients in that period.
• Client money balances are typically 129% of annual billings. The firms in the survey are holding about £2.3bn in client deposits. It is clearly important that firms do everything possible to ensure that these funds are kept secure and that there is a focus on cyber security.
• 24% of firms have experienced a fraud related loss or cyber-attack in the last year.