Mixed profits in country firms

The 2001 Survey of Law Firms has seen a further increase in the number of participants to 325 firms – the highest number in the history of the survey, and representing a quarter of firms in Scotland.  The report on the Survey was published earlier this month and distributed free to all participating firms.

The largest group of participants, 270 firms, had under five partners, and this article concentrates on them.  As the table indicates, nearly 60% of these firms were drawn from outside the big cities – they are referred to as “country” in the report.

As chart 1 indicates many of these smaller firms are earning relatively low profits – a quarter of sole practitioners earned under £28,000, a quarter of 2-4 partner firms earned under £35,000.

Firms earning very low profit levels are vulnerable to things going wrong, and to bad luck.  For these firms, long-term viability must be a concern.

Other firms of their size by contrast are earning much higher profits – a quarter of sole practitioners achieved profits in excess of £82,000, a quarter of 2-4 partner firms, over £70,000.

The survey indicates a very small increase in the profitability of country firms – an increase of 1% over last year – a decline in real terms.  Some sole practitioners in “country” areas do particularly well, indeed they consistently achieve the highest levels of profitability amongst country firms.  Chart 2 also includes the larger country firms.

Delegates at a recent Update seminar in Glasgow on Financial Management suggested three possible reasons for this:

• Some sole practitioners work from home and therefore have very low overheads;
• There is some quite good quality work available in rural areas, such as inheritance tax advice for farmers;
• It can be very difficult for small country firms to recruit assistant solicitors.  The result can be firms that comprise a sole practitioner, supported by a small number of support staff, and no other fee earners – and a very low salaries bill.  Some of these sole practitioners will work very hard, sometimes to the detriment of their own health and as a result will achieve good profits.

The more profitable firms will also probably have a fairly good understanding of the economics of their firms. They will understand the overheads they have to carry and the fees they need to bill.

Chart 3 illustrates the range in fees billed – measured in terms of fees per profit sharing partner.  This chart indicates that the total fees for a quarter of sole principals was under £80,000, and under £95,000 per partner for a quarter of 2-4 partner firms.  Unless you are a sole practitioner working from home it must be very difficult to earn reasonable profits at such low levels of fees.

Chart 4 indicates that in most smaller firms overheads run at around £40,000 per profit-sharing partner – but a quarter are under £25,000 and a quarter over £65,000 – a big range.  If you are billing over £100,000 as a sole practitioner – and a quarter are billing over £80,000 – and your overheads are under £40,000 then you could quite easily achieve good profits.

A number of conclusions can be drawn from the survey concerning smaller firms:

• Some very small firms are very profitable – their overheads are low, the profit-sharing partner(s) work very hard and long hours, and they may have a low salaries bill because there are no other fee-earners;
• Others are less profitable.  This may be because work that carries a low hourly rate is being done by an expensive fee-earner, often by partners.  More successful firms are often fairly clear what areas of work they do – and those they will not do, because they are not profitable.  They also try to ensure work is done by the correct level of fee-earner;
• Many firms also make little use of IT, yet this could enable them to reduce the cost of undertaking their work so making otherwise unprofitable work viable.

All participating firms receive a free copy of “The 2001 Survey of Law Firms in Scotland”, the detailed report upon which this article is based.  Other firms can purchase a copy of the full report which contains a wide range of useful statistics and performance indicators.  Priced at £80, this is available from Lisa Anderson at the Society on 0131 476 8164.

In April next year the President will be writing to all firms inviting them to participate in the 2002 survey.  Participation is free and carries a two hour CPD credit as well as a copy of the survey report.  In recent years there has also been a prize draw.  This year the prize – of a theatre weekend in London – was won by Friels, a three partner firm based in Uddingston, just outside Glasgow. The Society is again grateful to Alex Quinn for sponsoring the prize in 2001.

John McCutcheon, until his recent retirement, was Professor of Actuarial Studies in the department of Actuarial Mathematics and Statistics at Heriot-Watt University.  He is a member of the Society’s Remuneration Committee and, since 1980, has conducted the annual Expense of Time Survey. 

Andrew Otterburn is a management consultant and contributor to Update courses on practice management.  His book on the Profitability and Financial Management of legal practices is published by the Law Society in London.