Law Firm Benchmarking Providing clarity in the legal sector

Transcription

1 Law Firm Benchmarking 2015 Providing clarity in the legal sector

2 contents 1 Delivering profitability remains a challenge 2 Highlights from 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 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 us at legalbenchmarking@crowecw.co.uk

3 Benchmarking report 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 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 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 and regional firms respectively.

4 Highlights from Percentage of firms that showed an increase in revenue Revenue growth Revenue growth % Firms with increase in revenue greater than 10% 43% Percentage 54% Firms with increase in revenue up to 10% 40% Firms with fall 14% in revenue 17% Profit per equity partner (PEP)* Changes in PEP % Firms with increase in PEP greater than 10% 50% % Firms with increase in PEP up to 10% 23% 46% Firms with fall in PEP 27% *A partner in the top-tier of equity

5 Benchmarking report Fees per fee-earner (including partners) Increase in headcount Total partners Professional staff 000 Percentage Support staff Staff costs as a percentage of fee income Average employment cost per head Percentage 000 Average lock-up days at year-end Percentage top-tier partners of all partners No. of days Percentage WIP days Debtor days Top-tier partners Other partners

6 86% of experienced growth 63% of the firms that grew, grew by less than 10% Profit per equity partner (PEP) fell by 1% Fees per fee-earner increased by 4.8% Partner numbers increased by 2.7% 50% see price competition as the biggest challenge Overall, the 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.

7 Benchmarking report Net profit margins have increased marginally over the year but an increase in partner numbers has meant that a quarter of the 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 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, 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.

8 The regional view 83% of regional firms experienced growth 52% of the firms that grew, increased income by more than 10% Average PEP grew by 11% Fees per fee-earner increased by 2.5% Overall headcount up by 4% 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

9 Benchmarking report period, this has helped further improve the average net profit percentage to 29% from 27% in Profit per partner increased by 12% to 162,000 and, in contrast to the, 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. 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.

10 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? Price competition in the marketplace 20% 50% The availability of affordable, highquality personnel 25% 43% Government policy and the regulatory environment 4% 23% Other 14% 21% 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 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.

11 Benchmarking report 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. 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 months. For the, 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? Unlikely 57% 64% Likely Don t know 11% 14% 10% 30% Don t wish to say 3% 11% Last year, 27% of 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.

12 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 and 80% of regional firms have a partnership where at least half of the partners are aged below 55. The 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 There is no suggestion that the task of increasing profitability will get any easier over the next 12 months. 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.

13 Benchmarking report

14 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 louis.baker@crowecw.co.uk Steve Gale Audit Partner, Professional Practices steve.gale@crowecw.co.uk Ross Prince Audit Partner, Professional Practices ross.prince@crowecw.co.uk

15 Start the conversation Louis Baker Partner and Head of Professional Practices +44 (0) London Steve Gale +44 (0) London Mayfair Tom Elliott +44 (0) Cheltenham Mark Hunt +44 (0) Manchester Michael Jayson +44 (0) Midlands Ross Prince +44 (0) Thames Valley Jeremy Cooper +44 (0) Kent Simon Warne +44 (0) Follow us Find out more about us at

16 About Crowe Horwath International Crowe Horwath International is ranked among the top 10 global accounting networks with more than 150 independent accounting and advisory services firms in over 100 countries around the world. Crowe Horwath International s member firms are committed to impeccable quality service, highly integrated service delivery processes and a common set of core values that guide decisions daily. Each firm is well-established as a leader in its national business community and is staffed by nationals, thereby providing a knowledge of local laws and customs which is important to clients undertaking new ventures or expanding into other countries. Crowe Horwath International member firms are known for their personal service to privately and publicly held businesses in all sectors and have built an international reputation in the areas of audit, tax and advisory services. Follow us Crowe Clark Whitehill LLP is a member of Crowe Horwath International, a Swiss verein (Crowe Horwath). Each member firm of Crowe Horwath is a separate and independent legal entity. Crowe Clark Whitehill LLP and its affiliates are not responsible or liable for any acts or omissions of Crowe Horwath or any other member of Crowe Horwath and specifically disclaim any and all responsibility or liability for acts or omissions of Crowe Horwath or any other Crowe Horwath member. This material is for informational purposes only and should not be construed as financial or legal advice. Please seek guidance specific to your organisation from qualified advisors in your jurisdiction Crowe Clark Whitehill LLP 0240 Crowe Clark Whitehill LLP is registered to carry on audit work in the UK by the Institute of Chartered Accountants in England and Wales and is authorised and regulated by the Financial Conduct Authority.