Profitability at UK law firms jumped to a seven-year high last year, driven by robust fee income growth coupled with tight control of overheads, says Hazlewoods, Chartered Accountants and Business Advisers who specialise in the legal profession.
The findings are published in the Law Society’s Law Management Section Financial Benchmarking Survey 2017, which was written and produced by Hazlewoods*.
According to Hazlewoods, net profits generated by equity partners rose 8.5% last year alone to an average of £135,979 in 2016, compared with £125,340 in 2015.
Hazlewoods points out that fee income increased by an average of 5.8%, well above current inflation levels, meaning that firms are seeing strong growth in real terms. Corporate/commercial work, commercial and residential property, and probate and estates were among the practice areas seeing strongest growth.
At the same time, greater control over spending on major overheads such as office costs also contributed to the improvement in bottom line profits. Firms are looking to maximise efficient use of space that ranges from some law firms fitting more lawyers into the same floor space to more actively sublet excess space.
Law firms surveyed say they have also managed to keep marketing costs and professional indemnity insurance stable, helping to offset higher staff costs as pay in the sector continues to rise.
The median spend on non-salary overheads per fee earner was £36,865 in 2016, down from £38,730 in 2015. As a proportion of fee income, non-salary overheads dropped slightly, to 31.5% last year from 32.3% in 2015.
After deducting a notional salary and interest on capital, equity partners generated a median “super profit” of £55,941 per partner last year – up 6.7% from £52,436 in 2015
Overall profit margins hit 24.2% last year compared to 22.8% the previous year.
Andy Harris, Associate Partner at Hazlewoods, says: “This has been a strong year for many law firms following a run of profit growth, highlighting the strength of the UK’s world-leading legal profession.”
“Law firms of all sizes are enjoying the fruits of sound financial management plus a resilient market for legal advice.”
“While salaries may be rising, our findings suggest that most firms have a firm handle on their other big costs and are operating more efficiently to ensure benefit from the revenue increases they generate.”
President of the Law Society Robert Bourns, commented: "This survey is a great annual health check for mid-sized practices. The report indicates that, overall, participating firms are achieving a 10% net profit margin.
"The legal sector is an active and vibrant contributor to the UK economy. In 2015 it contributed £25.7 billion to the UK economy, £3.6 billion in net exports, with overall growth of 8%.
“Our Future of Legal Services report identifies the key drivers for change in the sector, together with the opportunities and potential challenges. Having good management helps firms financially, which will be important for them to remain sustainable in the face of increased competition."