More work, but not always more profit, for Scottish law firms, survey shows

Increasing work volumes have boosted revenue at Scottish solicitor firms, though sole principal firms are shown to be struggling, according to a survey run by the Law Society of Scotland.

Findings from the Society’s 2018 financial benchmarking survey, carried out by software firm Tribal and published in association with Clydesdale Bank, indicate that participating firms generated higher revenues through increased volumes of work, though that work may be less profitable. They also bring out the substantial differences in profit per partner figures between legal firms with fewer than 10 partners and those with 10 or more.

The responses from the 86 law firms which took part in the survey show an increase in the median profit per partner figure (before any salary drawings) to £76,000, up from £69,000 in the 2017 survey.

Larger firms with 10+ partners showed a significant improvement in the median profit per partner to £172,000, up 38% on last year’s findings. The equivalent figure for small to medium-sized firms that took part was relatively static at £79,000 for two to four partner firms, down from £82,000 in 2017, and £94,000 for five to nine partner firms, down from £96,000 the previous year.

Sole principal firms taking part had a median profit per partner of £48,000, down from £50,000 in the previous year, suggesting that they "continue to operate at the margins of commercial viability", the Society said.

Capital per partner showed an upward trend for small and medium sized firms, but not for sole principals or larger firms. Overall, two to four partner firms were in robust financial health, with good bank balances and low amounts of aged debt, and a median capital per partner up from £85,619 to £98,787. As with firms with five to nine partners, the median total profit margin was 30%.

For the latter category, the median bank balance was £86,000, an improvement on the 2017 result of a debit balance of £2,000, and on 2014’s result of a credit balance of £30,000. Median capital per partner was up from £67,000 in 2017 to £119,000.

Firms of 10 or more partners showed the highest property/conveyancing income per partner, with a median result of £209,298. Staff costs as a percentage of total income were broadly in line with other firm sizes, at a median of 36.3%, but debtor days were much higher, with a median result of 71 debtor days compared with 48 for five to nine partner firms and 30 for smaller practices. Median capital per partner was £98,000, slightly lower than for smaller partnerships.

Alison Atack, President of the Law Society of Scotland, commented: "The increase in the median profit per partner, although largely driven by the bigger law firms, indicates the Scottish legal sector is in pretty robust health overall which is encouraging.

"From the firms taking part, we can see that there has been a marked improvement in the profits per partner for larger firms, particularly those operating in the property sector. The survey results have shown that the participating two to four partner firms are performing well, although it would seem that some of their slightly larger competitors, while also performing well, are not necessarily benefitting as much as might be expected from economies of scale. In contrast the findings indicate that the smallest firms are finding it tough in the current economic environment. Small firms can include those providing legal aid funded advice and we will continue to monitor this."

Ms Atack added: "Knowing just how your business is performing is a crucial aspect of running a successful law firm and our financial benchmarking report is a useful part of any firm’s business management toolkit.

"Scottish solicitors operate within an increasingly competitive marketplace and this year’s financial benchmarking report provides insight for solicitors on how the legal market is performing as a whole, as well as enabling them to benchmark themselves against their competitors. The findings can guide their future planning and help them assess what is working well, in addition to any changes needed to develop their business. The overarching report also helps make sure we, as Scottish solicitors’ professional body, can offer the right products, services and support for solicitors."

Sue Carter, UK Head of Professional Services Sector at Clydesdale Bank, observed: "There are positive indicators in the report, including the overall increase in the median profit per partner figure. However the day-to-day challenges of generating new and profitable fee income, managing working capital and succession planning remain priorities. In general terms, two to four partner firms appear to be in good health, showing good bank balances and low amounts of aged debt, despite a small drop in the median profit per partner figure. Firms with five to nine partners also showed a slight drop in the median profit per partner and the survey findings indicate firms of this size face pressures from higher running costs, without any significant benefits of economies of scale, compared to their smaller competitors.

"The net profit percentage remains a key indicator of how well firms are performing and the fact that profit per partner for two to four and five to nine partner firms has remained relatively static, suggests they have perhaps suffered most from increased overheads, including salaries. The most successful firms focus on profit."

Click here to access the survey report. A feature reporting some of the key figures is published in this month's Journal.