A new survey of Scottish law firms’ finances has shown improving fortunes for smaller law firms as compared with their larger competitors.

Results from the Law Society of Scotland’s first financial benchmarking survey, published today, show that firms with between two and four partners are closing the gap on slightly larger firms with between five and nine partners, with regard to profitability per partner. In the former category median profits rose by 11% to £82,000 per partner, as compared with the results from the last cost of time survey in 2014, and that respondent firms of this size were largely in good financial health, with good bank balances and low debt.

That compares with just a 4% increase in median per-partner profits (profit before tax and allowances for equity partner salaries) of £96,000 for firms in the larger bracket.

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 five to nine partner firms that participated in the survey, "but is notable nevertheless", the Society comments.

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

Bigger firms (10 or more partners) which responded showed the highest profits per partner, at £125,000. That represents a fall from £163,000 per partner in the 2014 survey, but there were differences in the makeup of the group of firms that responded. The 2017 findings also highlight the high staffing costs, at around 43% of total income, of this group, indicating that these firms are not achieving the economies of scale that might be expected.

Although only comprising six of the 100 practices taking part in the survey, these bigger firms accounted for £71m of the £112m total revenue reported

Overall, the average profit per partner remained relatively static since 2014, at £69,000.

The interactive, online report, developed with technology systems and services provider Tribal, allows firms to access individual, confidential online reports on their financial performance, and to compare themselves with other reporting firms. All results have been anonymised to ensure confidentiality.

Published in association with Clydesdale Bank, the report enables firms to 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, for example plotting staff costs against profitability.

Solicitors will also be able to analyse trends for their firm, and their performance against other firms year on year.

Graham Matthews, President of the Law Society of Scotland, commented: “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."

He observed: “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: “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 Society’s annual conference next Tuesday, 19 September at the EICC in Edinburgh.

Click here to access the report.