When it comes to profitability, size matters, is the conclusion in the first article on the 2013 Cost of Time Survey. Could you improve your position by expanding?

Last year the Law Society of Scotland undertook a short survey of cashroom partners, asking for their view of the Cost of Time Survey and how it could be developed. It has been run for many years, and in many ways is very successful – we believe it is the largest annual survey of any Bar association in Europe. However, the time has come to ask how it could be developed further.

We had a good response, with 115 firms completing the survey. The main reasons firms participated were twofold – to obtain the CPD, but also because it was used as an important management tool to benchmark themselves with other practices: see chart 1.

A number of suggestions were made as to how the survey could be developed. As a result:

  • From this year, participants will have the option of completing the questionnaire electronically.

  • The structure of the report is being changed. In previous years, this report was structured according to type of benchmark; now it is being structured by type of firm.

  • The report will provide greater detail – it now analyses firms geographically within each size category.

Small and smaller

This year’s survey, which is once again based on a good response of 214 participants, indicates flat profits for many firms. The overall profit per equity partner was £64,000 in 2012, and is the same in 2013. Larger firms with more than 10 partners saw profits rise, as did firms with between five and nine partners, but smaller firms with under five partners suffered a decline.

Chart 2 highlights the variation that occurs due to size of firm, and indicates that profitability rises with size of firm. Clearly, the larger firms achieve higher levels of profitability, especially the major commercial firms in Edinburgh and Glasgow, but there is a clear correlation between profitability and size among smaller firms also.

Size matters because it generally enables firms to achieve better financial structures, introduce better ways of working, and attract better quality work. This is an important point because most firms in Scotland are relatively small. Approximately half of the 1,200 firms in Scotland are sole principals, and nearly 90% have fewer than five partners.

Clearly, firms have to be of an appropriate size relative to the market they operate in; however there may well be some small firms that could be more successful, and more profitable, if they were able to grow.

Good growth

While expansion can, of course, be a tricky issue, there are various different ways in which growth can be achieved.

Immediate growth can be achieved by two firms merging, and sometimes when this happens the benefits can be transformative. The right combination, done properly, can yield immediate results.

Very often, however, mergers are problematic, and for many firms there are, in reality, few they would wish to merge with. There has to be synergy in terms of culture and values, and they have to be people you would actually want to be in partnership with.

A second, often easier, route is to absorb or take over other smaller firms, and increasingly there may well be such firms looking for such an option, perhaps as an exit strategy for the partners or to solve succession issues. The addition of a small team or individuals can be a great way of increasing the size of existing teams, creating depth and increasing volume.

The main potential obstacle can be potential professional negligence claims, so as always, care and due diligence are required. The third main route is simply organic growth. However, this can be slow, and smaller firms are always vulnerable to good home- grown people leaving just at the point when they start to become profitable. Firms need to grow organically, but this by itself is unlikely to be sufficient as others may have grown faster.

The best forms of growth are often ones that: enable the work to be undertaken differently, perhaps by more junior people, because the greater combined volume of work can be processed differently; enable a firm to develop specialisms and a depth of knowledge and people that attracts additional and better quality work; permit firms to invest in newer and better technology that might have been beyond their budgets: a larger firm has more people to spread the cost over; enable the larger firm to invest in people they may otherwise not be able to afford – in areas such as marketing, IT and HR; enable some equity partners to retire, or at least come out of the equity, resulting in a different financial structure. The starting point, as always, is having a plan – a strategic plan for your firm, as without that it is hard to move forward.


Taking part: the benefits

This article is based on “The 2013 Survey of Law Firms in Scotland”, which is published in March. The survey is an extremely useful management tool and participants also receive a free confidential individual report. In April, the President will be writing to all firms inviting them to participate in the 2013 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. In 2013, the £700 prize was won by Norna Crabbe of West, Anderson & Co, Glasgow. The Society is again grateful to Alex Quinn & Partners for sponsoring the prize in 2013.

The Author
Andrew Otterburn has advised around 250 firms on their management and profitability, and is currently working with firms facilitating partner retreats, advising on management, and generally on how profitability can be raised. Author of Profitability & Law Firm Management (Law Society of England & Wales, 2007), his second book, From Recession to Upturn – financial management and strategy for law firms, was published by the Law Society of Scotland in 2010. He is a founder member of the Law Consultancy Network, a network of independent law firm consultants. Dr John Pollock, a consulting actuary, has been responsible for the administration and statistical aspects of the Cost of Time survey since 2002. John is well known to personal injury, employment and family law solicitors in Scotland through his expert witness work at Pollock & Galbraith Consulting Actuaries
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