Law Firm Benchmarking 2015
Providing clarity in the legal sector
contents
1 Delivering profitability remains a challenge
2 Highlights from 2014-15
4 City firms
6 The regional view
8 Looking forward
Law Firm
Benchmarking
2015
Crowe Clark Whitehill’s annual law firm benchmarking report provides an
early snapshot of the legal profession in England and Wales based on
firms’ most recent year-ends. Participants include City firms with over
£100 million turnover to smaller regional firms.
Those who participate in the benchmarking have access to their results
and the anonymised results of others through the interactive
OpenMeasures system. Users can customise their analysis and
benchmark their performance against relevant comparators.
To register for next year’s benchmarking email us at
[email protected]
Benchmarking report 2015 | 1
Delivering profitability remains
a challenge
The results of our annual benchmarking, based largely
on financial years ending in 2015, show that although
there is an underlying growth in revenue, converting this
into increased profitability has not been plain sailing.
For 2015, 85% of firms grew revenue, up from 76% in 2014 and 60% in 2013. Once again it
was the regional firms that reported stronger growth, judged on the proportion of those that
grew fee income by more than 10%.
Although this increase in the top-line is encouraging, firms have clearly faced challenges in
transferring this to the bottom-line, with considerable variation in results. Over a quarter of
the firms experienced a decrease in the overall profit pool and nearly 40% of firms saw a
decrease in average profit for ‘top-tier’ partners.
In our 2014 report we identified that firms were anticipating the need to increase headcount
and this has been borne out from the results this year. What is notable is that the regional
firms have kept a tighter rein on partner numbers.
We have seen signs of the predicted pressure on salary levels being realised with an
increase in the average cost of staff; this is being felt more by the regional firms.
Lock-up days have remained relatively consistent with the previous year. This is
encouraging and suggests that firms have managed to instil disciplines during tougher
times which are being maintained. It is important that firms do not lose focus on collecting
cash. As ever, there remains room for improvement in some firms.
The challenge to increase profitability seems set to continue based on what firms have told
us are their biggest challenges for the next 12 months. Half of the City firms identified price
competition in the marketplace as a barrier to success, while 43% of regional firms
identified their concern with the availability of affordable, high quality people.
‘Turnover is vanity, profit is sanity’ is a well-known expression in the corporate world and it
is equally true for professional firms. It is pleasing to note that, with the general economic
recovery, turnover growth is embedded across most of the legal sector. The challenge is no
longer growth per se, but rather translating growth into increased profitability. There is a
risk that firms will chase growth rates to match the headlines of some others and not focus
on the profitability of that growth.
In the rest of this report we provide some further commentary and analysis of our findings
and how they impact City firms and regional firms respectively. Highlights from 2014–15
Percentage of firms that showed an
increase in revenue
86
86
83
32%
64
2015
Revenue growth –
City firms
Percentage
2014
54%
14%
City firms
Regional firms
Profit per equity partner (PEP)*
Revenue growth –
Regional firms
Firms with
increase in
revenue greater
than 10%
Firms with
increase in
revenue
up to 10%
Firms with fall
in revenue
£484
£221
2015
City firms
Regional firms
32%
22%
Firms with
increase in
PEP
up to 10%
23%
46%
Firms with fall
in PEP
27%
2014
Regional firms
*A partner in the top-tier of equity
17%
Firms with
increase in
PEP greater
than 10%
£199
£’000
40%
Changes in PEP
City firms
£480
43%
50%
Benchmarking report 2015 | 3
Fees per fee-earner
(including partners)
£261
Increase in headcount
5.0
£249
£127
5.5
3.4 3.2
2.7
£124
0.7
2015
£’000
2014
Total partners
Percentage
City firms
Staff costs as a percentage
of fee income
35.2
41.9
Support
staff
Regional firms
Average employment
cost per head
£67.0
44.2
Professional
staff
£65.5
£36.2
£35.1
34.9
2014
2015
Percentage
£’000
Average lock-up days at
year-end
City firms
2014
Regional firms
Percentage top-tier
partners of all partners
42
115
2015
55
45
2014
42
110
2014
51
49
2015
60
40
2014
61
39
2015
66
63
2014
63
67
No. of days
2015
WIP days
Debtor days
City firms
Regional firms
Top-tier partners
Other partners
Percentage
2015
City firms
86% of City firms
experienced growth
Fees per fee-earner
increased by 4.8%
63% of the firms that Profit per equity partner
grew, grew by less
(PEP) fell by 1%
than 10%
Partner numbers
increased by 2.7%
50% see price
competition as the
biggest challenge
Overall, the City firms have had an
encouraging year as fee income growth is
concerned. The aggregate increase was
7.2% with only 14% of firms experiencing a
drop in revenue – last year, it was over one
third. For the most part, growth is steady
rather than spectacular. For those firms
that have grown, 63% have growth of less
than 10%.
Revenue growth in the year caused capacity constraint which was
unlocked by a 5.0% fee-earner headcount increase. As the revenue
growth rate exceeded the headcount increase, fees per fee-earner
increased by 4.8%. In 2014 we had found that the revenue growth of
around 8% that year was broadly managed by the then existing
fee-earner capacity. To grow further, firms have clearly determined
that additional heads were necessary.
Benchmarking report 2015 | 5
Net profit margins have increased marginally over the year but an
increase in partner numbers has meant that a quarter of the City firms
have seen a decrease in the average profit per partner. Profit per
‘top-tier’ partner (which is the approximation for PEP) has reduced
for 46% of the firms and on average by 1% to £480,000.
Total partner numbers increased by 2.7% in the year with, interestingly,
a 4% increase in the proportion of ‘top-tier’ equity partners, up to just
over 55%. This increase may, in part, be attributable to firms changing
their structures in response to the salaried members’ tax legislation that
impacts LLPs.
Firms have invested in both additional fee-earning staff and support
staff with an increase across the population of 5.0% and 3.4%
respectively but with no significant change in mix over the last year.
The increase in average staff cost of around 2% is the start of wage
inflation following a period of recession – average staff cost rose by less
than a quarter of 1% in our 2014 survey. We suspect that this will
continue through 2015–2016.
Firms on the whole are keeping WIP lock-up consistent with previous
years, although our measure is based on the valuation included in
the accounts. Clearly, there is a greater risk around gross WIP and this
is arguably a more important measure for firms in that it represents
where resources have been expended for which no income is
being recognised.
Debt lock-up is creeping up by a few days. This is not surprising given
increasing activity and the year-end billing exercise but firms should
ensure they do not take their ‘eye off the ball’.
There are still plenty of challenges facing the City firms, particularly
through price and other market pressures. There is greater pressure on
firms to invest for the future, for example in technology. Firms may have
used some of the ‘windfall’ capital received during 2014 after taking
action in response to the salaried members’ legislation for this.
Improving profitability in the medium to long-term will come with
enabling partners and fee-earners to work smarter not harder and
ensuring that the tools they have at their disposal are up-to-date and
efficient. Firms will be hoping that short-term investment pain will pay
off in the next few years.
The regional view
52% of the firms that
83% of regional firms
experienced growth grew, increased income
by more than 10%
Fees per fee-earner
increased by 2.5%
Overall headcount
up by 4%
Average PEP
grew by 11%
43% of firms see
availability of high
quality people as the
biggest challenge
‘Pretty good’ was a phrase we heard
numerous times when we asked firms how
their year was going. This has been borne
out by 83% of regional firms showing
revenue growth with over 50% of those firms
increasing their income by more than 10%.
What’s more, the growth appears to
be organic.
Headlines, however, do not tell the whole story and 2015 has been a
difficult year for some, with 17% of regional firms suffering a fall in
revenue. This is a slight increase on last year at a time when,
anecdotally, there is greater confidence in the sector.
In our 2014 report we identified significant investment in people to
create capacity. A 2.5% increase in fees per fee-earner indicates that
firms have been successful in utilising that new capacity and growing
the top-line. Staff costs as a percentage of fee income has remained
relatively stable at around 40% and, in an otherwise low inflation
Benchmarking report 2015 | 7
period, this has helped further improve the average net profit
percentage to 29% from 27% in 2014.
Profit per partner increased by 12% to £162,000 and, in contrast
to the City firms, PEP increased by 11% to £221,000. Again, it is not
all good news with 30% of firms actually seeing their overall profit
pool decrease.
The partnership makeup in regional firms has remained relatively
static, with no significant change in either the total number of partners
or proportion of ‘top-tier’ partners. The size of many of the regional
firms will have meant that they have not been impacted as much by
the salaried members’ legislation.
Regional firms have continued to invest in people, increasing their
fee-earning teams by 5.5% and their support staff by 3.2%. While
lower than the levels of recruitment we saw last year, when fee-earner
numbers increased by 10%, it demonstrates a continuing need for
additional capacity.
The predicted pressure on salary levels is evident with the average
staff cost per head increasing by just over 3% to £36,200. With 43%
of the regional firms having the availability of affordable, high quality
personnel as the biggest challenge for their future success, we do not
see any sign of this pressure abating in the coming year.
In 2014 we cautioned that the management of working capital during
a period of growth is critical to avoid running out of cash. Lock-up
days have remained virtually static at an average of 129 days and the
split of WIP to billed debts is almost equal. Improving lock-up
releases cash – a review of process and a little extra discipline can
have a significant effect.
For regional firms, this year’s results might be summarised as ‘a
return to the norm’, with steady growth, manageable salary inflation
and consistent lock-up. However, from our discussions with partners,
finance directors, Compliance Officers for Finance and Administration
(COFA), banks and others, we know that there are a lot of changes
happening behind the scenes to ‘maintain the norm’. With so much
happening in the legal sector, it will be those firms who are
change-ready who will come out on top in the next few years.
Looking forward
As well as details on financial performance,
we asked firms to provide their views on the
factors that will impact their future success.
What do you think represents the biggest challenge to your
firm’s future success?
50%
Price competition
in the marketplace
20%
The availability of
affordable, highquality personnel
Government policy
and the regulatory
environment
25%
43%
4%
23%
21%
Other
14%
City firms
Regional firms
In 2014 we found some consistency between the City and regional
firms but this year there is evidence that their respective focus might
be different.
Within the City, the biggest perceived challenge is price competition.
New market entrants with highly-leveraged business models, the
continued evolution of automated workflows and a general increase in
the price-awareness of clients, has all added to the pressure to
deliver higher quality service at lower cost.
That a lesser proportion of regional firms consider this to be the
biggest challenge may be because ‘high-street’ law has been subject
to price pressure for a number of years. There is still no clear sign of a
newcomer who will fundamentally shake the market in the manner
that ‘Tesco’ law was predicted to do, but that is not to say it will not
happen soon.
What does concern regional firms most, and City firms to a lesser
extent, is the availability of affordable, high-quality personnel. With
the upturn in economic outlook, there has been a race to recruit good
people to create capacity. Firms must now look at innovative ways to
retain their key players, especially their young, rising stars.
Benchmarking report 2015 | 9
Although the Solicitors Regulation Authority (SRA) has publicised its
drive to reduce the regulatory burden (particularly for smaller firms),
government policy and the regulatory environment was identified by
nearly a quarter of the regional firms to be the biggest challenge to
their future success. There is a clear contrast here with the City firms.
The introduction of the SRA’s new regulatory regime in 2011
coincided with the period where firms were recovering from the
recession and placed considerable burden on them. Many now
merely want stability and consistency in the regulatory regime.
Alternative Business Structures (ABS) do not appear to be a key
strategic step for most firms. Although 16% of firms already held
an ABS licence, nearly 85% stated that they had no plans to become
an ABS in the next 12-24 months. For the City firms, the result was
over 90%.
So are firms more interested with growth by consolidation? Overall
this does not seem to be the case with 60% stating that merger or
acquisition in the next 12 months is unlikely but attitudes to this
course of action seem to be changing between the City and the
regional firms.
Is your firm considering merger or acquisition in the next 12 months?
64%
Unlikely
57%
11%
Likely
30%
14%
Don’t know
Don’t wish to say
10%
11%
3%
City firms
Regional firms
Last year, 27% of City firms said it was likely that they would consider
a merger in the next 12 months but this year that has dropped to 11%.
Conversely, 30% of the regional firms now say that they are likely to
consider a merger in the next 12 months. A year ago, that figure was
only 18%.
Succession has long been a concern for many law firms and was a
theme throughout those firms that responded ‘other’ to our future
challenges question. We asked firms what proportion of their
‘top-tier’ (or senior equity) partners were over 55. The results indicate
that firms are very much alert to the issues surrounding succession
with only 2% having more than 75% of their partners in that range.
Proportion of partners aged 55 or over
Between 25%
and 50%
46%
Less than 25%
38%
Between 50%
and 75%
14%
Over 75%
2%
It is encouraging to see that 89% of City firms and 80% of regional
firms have a partnership where at least half of the partners are aged
below 55. The City firms appear to be most robust in refreshing the
partner pool with 46% of firms having less than a quarter of the senior
equity pool in the top age band. The regional firms need to ensure
that they prevent ‘drift’ towards a succession problem in the
coming years.
Looking forward to 2015—16
There is no suggestion that the task of increasing profitability will get
any easier over the next 12 months. City firms cite price competition
as a significant challenge to their business and regional firms are
facing ever increasing pressure on salary inflation to attract and retain
talent – forces which both exert a downward pressure on profit
margins. The continual evolution of the regulatory environment
takes up time and resources and government policy affects all firms,
with cuts to legal aid and pensions auto-enrolment being just two
recent examples.
Increasing profitability is, of course, a simple concept – charge more
for the services you provide and/or reduce the costs of providing
them. The good news is that growth creates greater opportunity to do
so as ‘investment in change’ always seems easier when revenues are
rising. Firms who invigorate their client service offering, streamline
their workflows and leverage technology and their people will be
those who, in the mid-term, report the strongest profit margins.
Benchmarking report 2015 | 11
Clients are able to draw on the highest levels of expertise from
our specialist professional practices team. Many of our highly
experienced partners have served in the management team of
Crowe Clark Whitehill. This personal knowledge of professional
practice management is backed by significant industry-wide expertise.
By playing a leading role in key industry bodies, we are able to share
the latest thinking with you and guide you to where you want to be.
Louis Baker
Partner and Head of
Professional Practices
Steve Gale
Audit Partner,
Professional Practices
Ross Prince
Audit Partner,
Professional Practices
[email protected]
[email protected]
[email protected]
Start the
conversation
Louis Baker
Partner and Head of Professional Practices
+44 (0)20 7842 7161
London
Steve Gale
Manchester
Michael Jayson
+44 (0)20 7842 7262
+44 (0)161 214 7520
London Mayfair
Tom Elliott
+44 (0)20 7842 7372
Cheltenham
Mark Hunt
+44 (0)1242 234421
Midlands
Ross Prince
+44 (0)121 543 1972
Thames Valley
Jeremy Cooper
+44 (0)118 959 7222
Kent
Simon Warne
+44 (0)1622 767676
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