Profitability squeezed for sole practitioners

The 2002 Survey of Law Firms once again saw a large number of participants. 270 firms took part, representing a quarter of firms in Scotland. The report on the Survey is published in February and will be distributed free to all participating firms.

As table 1 indicates, a significant number of smaller firms once again took part, and over half the participants were, as in previous years, outwith the main cities – described as “Country” in the Survey.

Chart 1 summarises the overall profitability of the 270 firms. As in previous years, a wide range is indicated – at one extreme, a quarter of sole principals earned under £25,000 – at the other, a quarter of firms with more than ten partners achieved average profits per profit-sharing partner of over £140,000.

Note: The mid point, or median, is the middle value in the range and is not influenced by the magnitude of the extreme values (as the average is). The 25% and 75% points indicate the range of values. 25% of firms are below the 25% point, and 25% of firms are above the 75% point. These points are also known as the “lower quartile” and “upper quartile” respectively.

Overall, average profit per profit-sharing partner was just under £59,000 – up from last year’s average of £54,000. These overall figures however masked falls in profitability for sole principals – down from £46,000 last year to £40,000 this year, and also for the most successful larger firms. Last year a quarter of firms with more than ten partners achieved profits of over £175,000.

The latter is likely to be due to the slow down in corporate work in recent months;

“We have seen two areas where work has slowed down – corporate and PFI. Corporate is still busy, but has slowed, however our PFI work has been very quiet for the whole of 2002. Construction litigation is booming, employment is very busy, Intellectual Property is good, and property has been strong. Overall, our fees have probably increased by 8% over last year.”  Managing partner – 10+ partner firm

The former may be due to more general pressure on smaller firms:

“In order to understand why sole principal profits have fallen you probably need to look at the work the firms do and where they are based. There may well be regional variation, with firms on the east coast doing better than those in the west. I am a relatively niche practice and have probably not felt the pressure more general practices have probably experienced. I suspect some firms that do crime may find fixed fees difficult, and I think there is always pressure for conveyancing and securities work to move away from the rural practice towards the cities.”"  Sole Principal – Ayrshire

Location can be an important underlying factor as it can influence the type and amount of work that is available. Charts 2 and 3 analyse, for the first time, the profitability of firms within Edinburgh and Glasgow respectively.

Note: Some of these charts are based on relatively small samples, therefore the quartiles must in some cases be treated with care.

Chart 2 indicates the healthy financial performance of many Edinburgh firms of all sizes, yet also shows some low profit levels – a quarter of sole principals earned under £16,000 a year. A quarter earned over £90,000 – more than the top performing 2-4 partner firms who earned over £80,000. The overall strong Edinburgh profits will be due, at least in part, to the strong conveyancing market, the city’s commercial base and Court of Session work.

In Glasgow also, a quarter of sole principals earned under £17,000. A similar range exists, with a quarter of Glasgow sole principals earning more than £78,000. The results for the 2-9 partner firms are not dissimilar to Edinburgh.

Note: Because fewer large Glasgow firms participated, the median only is shown.  Because of the small sample size this figure must be treated with care.

Charts 4 and 5 indicate that whilst sole principals in Country areas, and also in Aberdeen, Dundee and Perth, achieved lower profits than their counterparts in Edinburgh and Glasgow they did not suffer the very low figures of the poorest performing firms. Some strong results were also indicated, with a quarter of Country and Aberdeen, Dundee and Perth 2-4 partner firms achieving profits per partner over £86,000 and £99,000 respectively.

Note: Because fewer 5+ partner firms participated, the median only is shown. Because of the small sample size this figure must b treated with care.

The comments from this firm are probably typical of many mid-sized practices:

“Last year was certainly busy as regards the property market. As to whether or not we made any money I cannot tell! We are presently trying to grow the business which I think has distorted the profit figure. We remain poor at billing out true worth and collecting outstanding fees. That said we now have a Business Plan, monthly management figures etc which is a vast improvement on before.”

In addition to location, the profitability of a firm of solicitors is related to a number of basic factors. These will include the type of work undertaken, the quality of the firm’s client base, the quality of the firm’s fee-earners and support staff, and how hard people work.

A firm’s financial structure can also have big impact, especially its “gearing”. Our second article, in the next edition of the Journal, explores these areas in more detail, and looks at the characteristics of the most profitable firms in Scotland.

All participating firms receive a free copy of “The 2002 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 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 Hamilton at the Society on 0131 476 8164.

In April the President will be writing to all firms inviting them to participate in the 2003 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 break in London was won by Pamela Gray of Lefevre Litigation in Aberdeen. The Society is again grateful to Alex Quinn for sponsoring the prize in 2002.

Andrew Otterburn is a management consultant and for many years has run practice management seminars on behalf of the Society. He has helped in the development of the Cost of Time Survey since 1999, working initially with Professor John McCutcheon and now with Dr John Pollock. His new book, Profitability and Law Firm Management, is published by the Law Society in London.

Dr John Pollock, a consulting actuary, was responsible for the administration and statistical aspects of the Cost of Time survey in 2002 having taken the place of Professor John McCutcheon on the Law Society of Scotland Remuneration Committee last year. John is well known to personal injury, employment and family law solicitors in Scotland through his expert witness work at Pollock & Galbraith Consulting Actuaries.