The results of Crowe Clark Whitehill annual Law Firm Benchmarking report for 2015 shows that law firms are struggling to convert increased revenue into increased profitability.
Crowe Clark Whitehill’s annual Law Firm Benchmarking report has shown that, although 2015 has so far seen a number of law firms reporting great results, it is not all plain sailing. Just over a quarter of firms have seen their overall profit pool decrease, including 30% of regional firms and 21% of City firms.
The impact of this has been felt through to Profit per Equity Partner (PEP) with 38% of firms experiencing a decrease – 46% of City firms and 30% of regional firms. For firms that grew PEP, regional firms performed better with 43% increasing PEP by more than 15% compared to just 25% of City firms.
Louis Baker, Head of Professional Practices at Crowe Clark Whitehill, comments:
“For the second successive year, the proportion of firms reporting increased fee income has increased to just under 85%, up from 76% in 2014 and 60% in 2013.
“Although the growth of the top-line is encouraging, firms have clearly faced considerable challenges in translating this to the bottom line profit growth.”
As anticipated in the 2014 Benchmarking report, total headcount at firms increased by 4%. This is consistent between the City and the regional firms. Notably, regional firms have kept a tighter rein on partner numbers, increasing by just 1% compared to just under 3% for the City firms.
Predicted pressure on salary levels has also been realised with the regional firms having to do more to ensure that they attract and retain staff. Average employment cost per head in the regional firms increased by just over 3%, a full percentage point more than the City firms.
Despite these issues, there are some encouraging signs. Lock-up days remained relatively consistent with 2014, suggesting that firms have managed to instil disciplines during tougher times which are being maintained.
Louis concludes: “‘Turnover is vanity, profit is sanity’ is a well-known expression in the corporate world, and it is equally true for professional firms.
“For a successful business, growth needs to be sustainable and profitable. Firms should ensure that this is their focus when measuring success. Firms and partners should not necessarily be too down-beat if their own growth does not match the headlines generated by those that shout loudest.”
Looking forward, this year’s benchmarking exercise has also revealed that 2015/2016 might bring more merger activity within the legal sector, particularly with the regional firms, 30% of whom see a merger being ‘likely’ in the coming year. The City firms are more cautious with only 11% viewing this option as ‘likely’. This provides an interesting contrast with the firms that participated last year when over 27% of the City firms saw merger as likely but less than 18% of the regional firms.
Read the full Law Firm Benchmarking Report 2015