Tough times are still ahead

The Law Society of Scotland’s 2011 Cost of Time Survey of solicitors’ firms in Scotland indicates an 11% rise in profits last year, taking the median profit per equity partner back to 2004 levels of £71,000, still well below the levels achieved in the good years from 2005 to 2008.

Based on the results of 238 firms, this is the largest annual survey undertaken by any Law Society in the UK and probably the largest representative survey of law firms in Europe.

Hopefully, the 2010 result of £64,000 will represent the lowest point that profits will fall to. However, economic conditions are still extremely tough for most firms, with further difficulties potentially ahead in 2012.

Chart 1 illustrates a strong performance from 5-9 partner firms; however, there was a further slight fall for sole principals, and flat profits for 2-4 partner firms. Profits for the larger, 10+ partner firms also fell, but this must be treated with a degree of caution as the sample size was relatively small.

Small and struggling

While the headline profit per partner increased, life has continued to be extremely difficult for smaller firms and in particular those that undertake legal aid. Many will be able to relate to these quotes from some of the sole principals and 2-4 partner firms that took part:

• “Fee income will be down due to cutbacks in legal aid.”
• “My business is 100% criminal court work. The volume of prosecutions is likely to fall by up to 25%. The Legal Aid Board has cut fees and grants of legal aid by 10-15%. Overall, expect a fall in profit of 25%.”
• “Fee income reduced 2009 and 2010 due to severe drop in conveyancing work. Existing staff have reduced hours and salaries are accordingly less.”
• “Fee income continues to be disappointing, particularly for conveyancing, and costs therefore have to be kept to a minimum. No real change expected this year.”
• “Market conditions are dire and we are an established practice with a good broad client base.”
• “Large reduction in profit, legal aid payments will be down 30%.”
• “Very difficult conditions for the ‘family’ high street practitioner, with no end in sight.”

Fragile economy

Chart 2 illustrates the median profit per equity partner for sole principals by geographic area.

Chart 2 indicates that “country” sole principals have fared better than their equivalents in Edinburgh and Glasgow, with median profits over the last two years of about £55,000, compared with approximately £40,000 in Edinburgh and Glasgow. The sole principals in the Aberdeen, Dundee and Perth (ADP) category had an especially tough year.

Chart 3 shows the median profit for 2-4 partner firms and indicates a very mixed picture, with flat profits for country firms over the last three years of £76,000; flat profits for the last two years for ADP firms at £72,000; increased profits for Edinburgh firms of this size; and lower profits for Glasgow firms.

Some of the sole principals and 2-4 partner firms were suffering less:

• “Appear to be busier than a year ago; some improvement in conveyancing and more executry work.”
• “This current year, we have fared better than expected but we are not at all complacent about the future.”

While some firms have done better in the last year, most are still in an extremely difficult position and the coming year will be no easier. The economy is extremely fragile and is likely to tip back into recession, further cuts in legal aid are possible, and in due course competition will increase as the Legal Services (Scotland) Act comes into effect.

Still good advice

Last year we provided a checklist of action points that firms should consider. The list bears repetition, and it is good to tackle these points now while you still have time to respond:

Anticipate your firm’s financial outlook

• Prepare a fees forecast for the coming year. Also project salaries and overheads and prepare a budget for the coming year – make sure you do not draw more than the projected profit.
• Prepare a cash forecast – typically for the next three or four months on a weekly basis – so you get a feel for the peaks (caused by income tax and VAT payments, and rent) – and are able therefore to speak to the bank in advance if you need to.
• Consider what financial information could be usefully shared with other fee earners and staff, and might be used to improve performance.

Try to develop a plan

• Consider your firm’s strengths and its weaknesses. Is it vulnerable or do you see opportunities? What might the implications be?
• Develop a business plan for your firm, using an external facilitator if appropriate. Try to deal with difficult decisions facing the firm.
• Consider whether the firm is large enough to face the challenges ahead. One of the results of the relatively long build-up to the Legal Services Act south of the border is that many firms are looking at the possibility of merger – often as a defensive move, but sometimes so as to create a business much better able to respond to the challenges. Merger, in order to better develop teams and make a firm more cost effective, may increasingly be part of the strategy of firms in Scotland.

Improve ongoing management

• Review how your firm is structured and managed – is the structure right and are the best people managing your firm? Are you making the most of the skills of your partners and other senior staff?
• Review the financial information the partners look at. Does it highlight the key figures that are central to profitability? Many of these are included in the Cost of Time Survey and a number of the firms that take part benchmark their performance against the figures produced in the survey.
• Review actual performance against budget every quarter – and update the business and marketing plan.
• Make sure your partners and other lawyers are getting out and about, as that is when they will stumble onto work opportunities.

2012 Survey

Taking part: the benefits

All participating firms receive a free copy of “The 2011 Survey of Law Firms in Scotland”, the detailed report upon which this article is based. They also receive a free confidential individual report. Other firms can obtain a copy of the full report, which contains a wide range of useful statistics and performance indicators, from the Professional Practice Department at the Society on 0131 476 8164 (mail to: profprac@lawscot.org.uk).

In April, the President will be writing to all firms inviting them to participate in the 2012 survey. Participation is free and carries a three-hour CPD credit as well as an individual report on cost rates in the firm and a copy of the survey report. In recent years, there has also been a prize draw. Last year, the £700 prize was won by Frances McCartney of Patrick Campbell & Co, Glasgow. The Society is again grateful to Alex Quinn and Partners for sponsoring the prize in 2011.