Larger law firm profits rise, while small firms continue to feel the pressure
The Law Society of Scotland's annual financial benchmarking survey has shown a flatlining in profits for law firms overall, with very small firms under particular pressure.
Larger firms, with 10+ partners, have improved their profitability in the past year, especially the major commercial firms in Edinburgh and Glasgow, and there was also a clear correlation between profitability and size among firms with between five and nine partners.
The 2013 survey, based on responses from 214 firms across Scotland, shows that profits are yet to reach pre-recession levels. The overall median profit per equity partner for all firm types in 2013 was £64,000 - as it was in 2012 - which remains far below the 2008 pre-recession median profit levels of £104,000.
The results illustrate the sharpening divide between the profitability of larger and smaller law firms. Those firms with more than 10 partners saw their profits rise, with a median income of £197,000 per equity partner, up from £163,000 the previous year. Firms with 5-9 partners also saw a rise from £76,000 to a median income of £98,900 in 2013. However smaller firms with fewer than five partners suffered a decline, with 2-4 partner firms dropping from £67,000 to £64,000 in 2013.
Sole principal firms fared worst of all and the median profit for this group was just £47,000, compared to £53,000 the previous year. A quarter of sole practitioners earned less than £27,000, with the profitability of many sole principals in Edinburgh and Glasgow particularly low.
The profit referred to in the report is before tax and any allowance for salary. An equity partner's ability to take any income is dependent on the cash available, which can be limited if, for example, the firm is expanding.
In addition to publishing the annual cost of time report, the Society has issued practical new guidance on financial stability for law practices to help ensure effective management of firms and maintain financial stability. The materials include a diagnostic tool, key financial ratios and a guide to partner drawings and capital.
Lorna Jack, Chief Executive of the Law Society of Scotland, said: "Our latest benchmarking survey has brought positive news, with some firms seeing growth as we begin to emerge from the economic downturn. However, it's clear that the effects of the recession are not over and the report confirms the difficulties that sole practitioners in particular have in sustaining a viable business as the market continues to change.
"All firms have been affected by tightened budgets across both the private and public sectors and we continue to encourage our members to think very seriously about how they shape their business and to look hard at their strengths and weaknesses to make the most of available opportunities.
"The legal services sector is, and will remain, highly competitive and as it continues to change it's vital that our members make sure that they take steps to ensure that they are effective business managers as well as excellent solicitors and think very seriously about how they shape their businesses to make the most of available opportunities.
"We will continue to look at what we can do to help support firms, from tailor-made events aimed at helping day-to-day business operations or knowledge of the law, to business development opportunities. The survey, along with guidance we have published this year will help firms assess and improve their own financial standing and our members should look out for free online learning modules which will be launched this year."
ENDS 8 APRIL 2014
Note to editors
The survey is carried out annually by Dr John Pollock, from Pollock & Galbraith Consulting Actuaries, and the full report prepared jointly by Dr Pollock and management consultant Andrew Otterburn.
Based on the results of 214 firms, this survey is the largest undertaken by any of the UK Law Societies and is believed to be the largest representative study of law firms in Europe. The full results can be found on the Society's website - financial benchmarking.
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08 April 2014