Smaller law firm finances picking up, benchmarking report finds

Finances at smaller law firms in Scotland improved in 2013-14, but concerns remain particularly over small legal aid practices, the Law Society of Scotland reported today.

The Society's annual Cost of Time Survey of law firms’ financial performance, in which 185 firms took part, showed an overall increase from £64,000 to £69,000 in average profits per equity partner, before their salary, tax, and other business costs. Smaller firms, which make up just over a quarter of the Scottish legal market, performed strongly, with 2-4 partner firms showing a rise in profits per partner from £64,000 in 2013 to £74,000.

Firms with 5-9 partners showed profits per equity partner of £92,000, a drop from £99,000 in 2013 but improved from 2012 figures of £76,000.

Larger firms continue to achieve the highest profits per partner, although this year showed a drop from 2013 figures, which peaked at £197,000, to 2012 levels of £163,000 profit per partner.

The report reveals wide variations within each band. Median figures for sole practitioner solicitors ranged from around £18,000 a year (representing a quarter of sole practitioners) to £91,000. For firms with 10 or more partners, profits per equity partner ranged from £120,000 to more than £300,000.

Alistair Morris, President of the Society, said: “The annual survey gives us a view of the overall financial health of the profession. In general, law firms appear to be recovering in the wake of the downturn, although they are yet to reach the same levels of profitability seen in 2008.

“In recent years solicitors have experienced a period of unprecedented change. The economic climate, digitalisation and technology, globalisation and new entrants to the market have all contributed to this change and we have seen significant consolidation within Scotland’s legal sector, including cross-border mergers with UK and global law firms. We have also seen some high-profile firms fail, but these have been relatively few."

Mr Morris warned that despite increased optimism within the profession and a more buoyant legal market, "the survey has also highlighted very low profit per equity partner levels for some firms – as low as £15,000 for some sole practitioners in Glasgow. These very small firms often undertake legal aid, providing a key service within their communities, and it underlines the need for us to continue to press for an appropriately funded system to ensure that people can access the legal advice and services they need, regardless of their financial situation".

He added: “The legal sector remains highly competitive and it is increasingly the case that solicitors require to be excellent business managers, as well as having the legal knowledge and skills clients expect, to run a successful law firm. The survey has shown once again that cash flow is a key issue. For many firms, getting paid promptly remains difficult so it is vital that they manage their cash flow and credit control and equally importantly, are clear with clients about the cost and billing arrangements.

“Many solicitors find the report a highly useful and important management tool which allows them to measure their own performance as well as benchmark their firm with other practices The Society can also offer training and support for its members on a whole range of business management and financial planning, including our business sustainability toolkit launched last year.”

Click here to view the report. An article on the findings was published in the April Journal.