Financial benchmarking survey shows improving fortunes for smaller law firms

A survey of Scottish law firms’ finances has shown improving fortunes for smaller law firms.

Results from the Law Society of Scotland’s new Financial Benchmarking Survey, published today, Thursday, 14 September,has shown that profits per partner (profit before tax and allowances for equity partner salaries) for the respondent firms have remained relatively static since the previous Cost of Time survey in 2014, at £69,000.

The figures also indicate that firms with 2-4 partners are closing the gap on slightly larger firms of 5-9 partners, with regard to profitability per partner.

The Financial Benchmarking Report 2017, published in association with Clydesdale Bank, has shown that 2-4 partner firms’ median profits rose by 11% to £82,000 per partner and that respondent firms of this size were largely in good financial health, with good bank balances and low debt.

There has also been an increase in profitability for sole practitioners taking part in the survey, from £41,000 to £50,000 since 2014. Median profits for sole practitioners in Glasgow were low at £40,000, although they represent an improvement on the 2014 figure of £26,000.

The survey’s findings have highlighted some of the pressures facing firms in the 5-9 partner bracket, with just a 4% increase in median per-partner profits of £96,000. The findings also showed median bank balances were overdrawn by £2,000, falling from a credit balance of £30,000 in 2014. This result may reflect the financial health of the sample of 5-9 partner firms that participated in the survey, but is notable nevertheless.

Bigger firms of over 10 partners which responded showed the highest profits per partner at £125,000. The differences in the respondent group since 2014 may account for the drop from £163,000 that year. The survey findings for 2017 have also highlighted the high staffing costs, at around 43% of total income, indicating that these firms are not achieving the economies of scale that might be expected.

A total of 100 firms (9% of all Scottish law firms) took part in the Law Society’s redesigned financial benchmarking survey. The interactive, online report, developed with leading technology systems and services provider Tribal, features additional metrics to the previous Cost of Time Survey, and allows firms to access individual, confidential online reports on their financial performance. They can also compare themselves with other law firms in Scotland. All results have been anonymised to ensure confidentiality.

Firms can view and compare:

• Income and costs by size and/or location of a firm
• A breakdown of the firm’s total costs
• Cashflow management
• Relationships between different results such as, plotting staff costs against profitability

The new system will allow solicitors to analyse trends for their firm, and their performance against other firms year on year.

Graham Matthews, President of the Law Society of Scotland, said: “Our new benchmarking tool, which is completely secure and confidential, will be a valuable asset for solicitors in managing their businesses, allowing them to analyse their income and expenditure to help them plan more effectively for the future.

“The overall figure for profit per partner is similar to those in 2014, but we are yet to see a return to the 2008 pre-recession median profit levels of £104,000, highlighting the serious impact of the lengthy downturn on Scotland’s law firms.

“There has been enormous change in the legal sector since we first introduced the cost of time survey over two decades ago. Solicitors operate within an increasingly competitive marketplace, whether at a local, national or international level. The profession as a whole has adapted to meet changing client needs, and adopted new technologies to improve their business practice and client services.

“As the legal market continues to evolve it is vital that our members take steps to ensure that they are effective business managers as well as excellent solicitors. The new survey reflects the Society’s drive to innovate and provide services to help our members. We will continue to develop the survey, and expect increasing numbers of firms to participate and take advantage of the insight it offers into their financial health each year.”

Sue Carter, UK Head of Professional Services Sector at Clydesdale Bank, said: “We're delighted to be working in association with the Society for its relaunched Financial Benchmarking Survey.  The survey will help firms to dig beneath the headline financial figures, with the additional data helping to support their strategic thinking. There are many positive indicators in the report and whilst we expect to see continued consolidation, the day to day challenges of generating new and profitable fee income, managing working capital and succession planning, remain priorities."

Tribal is holding a workshop session at the Law Society’s annual conference on 19 September at the EICC in Edinburgh. Delegates can find out more and book a place at Leading Legal Excellence: For the Greater Good

Read the full report: Financial Benchmarking 2017

Note to editors

Profit per partner
It should be noted that profit is before any allowance for salary and is before tax. An equity partner’s ability to take any income is dependent on cash being available, which may not be the case if, for example, the firm is expanding.

Tribal
Tribal is a world-class software and services provider, with a market-leading benchmarking division that has been operating for over 20 years. Tribal operate internationally and serve customers in over 50 countries. Tribal Benchmarking has carried our benchmarking studies in numerous sectors which include universities and colleges, local authorities, careers services, hotels and leisure centres.

For the Law Society of Scotland Financial Benchmarking Survey, Tribal has been responsible for managing and collating data into a summary report available to the profession as a whole, and confidential, interactive reports for individual participating firms.

Clydesdale Bank
Clydesdale Bank is part of CYBG PLC Group. Clydesdale Bank was established in 1838 in Glasgow and, as one of Scotland’s largest banks, has a proud history of innovation and support for industry and communities across the UK.