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Law Firm

Benchmarking
2017
Providing clarity in the legal sector

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Contents
Overview 2
Highlights from 2016-17 3
City firms 5
The regional view 7
What lies ahead? 9

The big picture


Last year, we conducted our benchmarking during the first
few weeks of June, before the results of the EU membership
referendum were known. It is interesting to hear what law firms
think of the challenges they now face after having a year to
consider the implications.
The results of our annual law firm benchmarking, which Many firms successfully converted turnover growth
are based primarily on results from participants with into profit. Profit per Equity Partner (PEP) increased for
financial years ending in 2017, once again provide a 60% of participating firms, with half of those seeing
timely snapshot of the industrys performance in the UK. an increase of more than 10%. Of those firms that saw
a decrease in PEP, less than a third were firms with
In the face of economic and political uncertainty, many turnover below 10 million and almost half of them were
firms remained cautiously optimistic about their growth in the 20 million - 50 million turnover bracket. This
prospects. This years 7% aggregate growth across all suggests that smaller firms are continuing to hold onto
participants does not really surprise. top-tier equity and are, perhaps, more able to swiftly
react to any negative change in their top line.
This year, fewer than 14% of firms experienced a decline
in their top line and the overall average rate of decline In spite of the overall levels of growth, progress felt quite
was less than 4%; levels far below the steeper drops sluggish for many participants and the majority did not
that some firms faced just a few years ago. feel that they had met the business goals that they set
out to achieve for the year. Was this the Brexit effect?
The strongest year on year results were among firms
with turnover between 10 million - 20 million who saw Perhaps and perhaps not. There is a contrasting view
average growth of over 9%, while almost 1 in 5 firms between the City firms compared to those outside of
with turnover below 10 million experienced a fall in their London, with the largest proportion of regional firms
revenues. It appears that it was, once again, the smaller anticipating little impact but the same proportion of City
firms that had the more challenging year, especially firms seeing it as a real threat.
those outside of the City.
Despite Brexit being a key source of concern for the Most firms are all too aware of the importance of
City, it is the shorter term issues and those closer to managing their working capital and appear to be actively
home that remain the primary concerns for regional making improvements as shown by a reduction in lock
practices. The ability to attract and retain good quality up days this year. This was due to better credit control
staff is a perennial factor in regional practices success rather than the conversion of work in progress into billed
and that has not changed this year, with almost half still debtors and, while an improvement in debtor days is
citing it as their biggest challenge. clearly a step in the right direction, there are always
improvements that firms can make to help boost their
Despite these staffing concerns, average headcount cash position and minimise credit risk.
continues to increase for both City and regional firms,
though it was the City who, again, led the way with a The coming year is shaping up to be another challenging
7.5% rise in fee earner numbers. Does this suggest a time for those in the legal industry as competition
quiet optimism for 2017-18? remains fierce and gains in market share become
restricted to a smaller number of very successful firms.
The City remains a competitive place, with those firms
reporting a greater sensitivity to price competition than
their regional counterparts and we note that it was the
larger practices that held this view.

There was also a strong feeling that the biggest


emerging threat to any law firms market share will come
from other professional services firms outside of the
traditional law firm structure. If we had asked the same
question 10 years ago, it is likely that supermarket law
firms would have figured prominently in most peoples
answers, but now relatively few practices see this as a
major threat. Perhaps firms are considering the prospect
of a new age of multi-disciplinary practices?

Benchmarking Report 2017 | 2


Highlights from 2016-17

Percentage
Percentage
of firms
of firms Revenue Revenue
growthgrowth Revenue
Revenue
growthgrowth
with increased
with increased
revenuerevenue City firms
City firms Regional
Regional
firms firms

100 100
92% 92%
86% 86% 59% 59% 52% 52%
80% 80%
75 75
64% 64% 28% 28%
33% 33%

50 50
8% 8% 20% 20%

25 25
Firms with with increase
Firmsincrease than 10%
greatergreater than 10%

Firmsincrease
Firms with up to 10%
with increase up to 10%
0 0
2017 2017
2016 2016 Firmsfall
Firms with with fall

Profit per Equity Partner (PEP) Changes in PEP Changes in PEP


City firms Regional firms

800,000
36%
38% 24%
29%
501,000

600,000
446,000
319,000

309,000

400,000 40%
33%

200,000
Firms with increase in PEP greater than 10%

Firms with increase in PEP up to 10%


0
2017 2016 Firms with fall in PEP
Fees per fee-earner Increase in headcount
(including partners)

8 7.4%

237,000
237,000
300,000 6

4.9%

174,000
4.8%

175,000
200,000 4 3.7%

100,000 2
1.2%

0 0
2017 2016 -0.5%

ers taf
f taf
f
artn al s rt s
al p on po
Tot si Su
p
fes
Pro

Staff costs as a percentage Average employment cost per head


of fee income

80,000

66,400

66,400
60 60,000

39,700

38,400
42.8% 42.4%

40 36.9% 37% 40,000

20 20,000

0 0
2017 2016 2017 2016

Average lock-up days at year-end

Average lock-up days at year-end

2017 40 107
WIP days Debtor days
2016
2017 40
40 116
107
WIP days Debtor days
2016
2017 40 68 116
54
WIP days Debtor days
2016
2017 69
68 54 78
WIP days Debtor days
2016 0 20 69
40 60 80 10078120 140 160

0 20 40 60 80 100 120 140 160

Percentage of top-tier partners

Percentage of top-tier partners


2017 49% 51%
Top-tier partners Other partners
2016
2017 50%
49% 50%
51%
Top-tier partners Other partners
2016
2017 50%
54% 50%
46%
Top-tier partners Other partners
2016
2017 55%
54% 45%
46%
Top-tier partners Other partners
2016 0 2055% 40 60 45%
80 100
Benchmarking Report 2017 | 4
0 20 40 60 80 100
City firms
City firms have had a better year than 2016, with only 8%
reporting a fall in revenue compared to 23% last year. More
than 40% of participating firms felt that they fully achieved their
business goals in the year, with 13% actually surpassing their
expectations.

92% of firms
of firms that grew,
grew by more than 10%
experienced growth

Fees per fee earner


Mean PEP increased by 12%
were static

Partner numbers
26% of firms see
Brexit as their biggest challenge
increased by

4%

For the majority of firms that saw increased revenue, Increase in fees per fee earner (including partners)
the growth was steady and followed a similar path to has been static this year compared to growth of just
recent years. Of the 92% of firms that experienced under 3% in 2016. With City firms telling us that price
growth in the year, one third saw revenue increase by competition remains a key challenge, this is not a
more than 10%, compared to just over one quarter in surprising result.
2016. The aggregate revenue increase was 7.6% across
participating firms; up from 6.9% in 2016. The increase in demand for staff does not appear to
have driven up the cost, with the average cost per head
The message from last year, where firms placed remaining similar to last year. This is perhaps surprising,
importance on developing their fee earner teams, although last years 5% rise is now embedded and
has been evident with a 7.4% increase in fee earner general post-Brexit uncertainty may prompt a shift back
headcount, as well as a 4.8% increase in support staff. towards job security over mobility and higher pay.
This compares to increases of just under 6%
and 3% in 2016. Partner numbers continue to increase with a rise to
3.7%, compared to just over 2% in 2016. Of this, top-tier
partner numbers increased by 1.9%.
Although net profit percentage has only increased by and it is encouraging to see firms emphasising the
a very small amount, average profit per partner has importance of good credit control and working capital
increased by 4.2% which suggests that, despite a management.
strong increase in overall fee earner numbers, firms are
still being mindful of fee earner/partner leverage. It is important that firms remember that instructions are
only successful once the client has paid the bill and the
PI premiums continue to be unpredictable, with just cash is in the bank. Although credit control hygiene is
over 20% of firms seeing a decrease in their premiums, key to this, firms must also continue to emphasise the
compared to almost a third of participants last year. As importance of billing as soon as possible, not just at the
before, there seems to be little consistency in the rates end of the month. Small changes to standard practice
of change between firms, though there does appear to can have a big impact on lock-up.
be an upward trend overall as firms saw an aggregate
increase of 3.2% in the year. City firms should take note this year that they continue
to trail regional firms when it comes to lock-up overall.
Lock-up has fallen slightly compared to 2016, with City firms may be quicker billers, but they dont collect
overall lock-up days of 147 compared to 156 in 2016. cash as speedily.
This fall has come through a reduction in debtor days

Benchmarking Report 2017 | 6


The regional view
Overall, regional firms have had a more challenging year, with
around two thirds of firms feeling that they did not meet their
targets. Growth in regional firms lagged behind that seen in
City firms and PEP fell in 40% of firms.

80% 28% of firms grew revenue


by more than 10%
experienced growth

40% of firms saw


Top tier partner a fall in PEP
numbers
decreased by
3%

Fee earner
numbers 43% see availability of
high quality staff as the biggest
increased by

5%
challenge

Last year we noted that there were indications that There was continued steady growth in fee earner
growth in regional firms was becoming more difficult numbers again this year at around 5%, the same
and this view continued in 2017 with 20% of firms again increase as that seen last year, though growth in
seeing a decrease in revenue in the year. support staff numbers has slowed to just over 1%,
half of the growth rate in 2016.
Of those firms that did see growth, only 28% saw
revenues increase by more than 10%, compared to 41% In light of the steady increase in staff numbers, 43% of
last year and 52% in 2015; a real indication that, while regional firms cited availability of high quality staff as
the sector is still growing, competition continues to be their biggest challenge to future success; a view that
tight and a greater proportion of the market share is has not changed over the past few years. Wage inflation
being taken by a smaller number of firms. remains a pressure as staff costs increased by 3.2%
compared to just over 2% in both 2016 and 2015.
Aggregate partner numbers across the firms actually Although many economic factors are outside the control
fell this year by 0.5%, with the main shift being among of law firms, there are still internal processes that firms
top-tier partner numbers which fell by 2.8%. Was this fall can improve to promote success. It is encouraging to
in top-tier partners a reaction to changes in profitability? see that regional firms are consistently reducing their
A headline increase in aggregate profit per partner of lock-up. Across the firms that participated, we have
2% certainly does not tell the full story, with 40% of seen total lock-up days fall to 122 days from 147 days in
participating regional firms experiencing a fall in PEP 2016, and this fall is almost entirely attributable to falling
this year. With price competition, inflationary pressure in debtor days of 54 days compared to 78 in 2016. Good
personnel costs and, anecdotally, good quality property working capital practices can make all the difference
and space also costing more, it appears that even firms between success and failure. Of the high profile law
who are growing their top line are finding it hard to firm collapses that we have seen in recent years, it
translate that growth into bottom line profitability. is always cash, not reported profits, that has been
the primary driver. It is even more important for firms
Approximately half of regional firms attribute much that are experiencing growth to make sure that their
of the mixed year result to past investment decisions working capital housekeeping is in order and so it is
relating to staff, the effects of which are not always disappointing to see that regional firms still trail behind
immediately apparent. However, a large proportion of city firms with Work in Progress (WIP) days. Working
firms also recognise that the general economic and capital management is not just about chasing debts;
market conditions have also played a large role. good billing practices also make a big difference in
minimising credit risk and boosting cash flow.

Benchmarking Report 2017 | 8


What lies ahead?
One thing is clear when looking at what firms perceive to
be the biggest challenges to their success: although some
of the big issues are consistent with recent years and there
are clearly some new emerging challenges on the horizon,
the importance placed on those issues are still very different
between the City firms and the regional firms.
As before, it is the availability of personnel that is most Interestingly, last years results saw a much larger
pressing on the minds of the regional firms, with 43% proportion of City firms viewing affordability of staff as
citing this as their main challenge, compared to only being their main challenge compared to regional firms
12% of City firms. but this has reversed this year. Whether this means that
City firms feel that they are closer to achieving their
Affordability of staff is the next largest concern for the staffing targets, or whether they feel the employment
regions, at 22% compared to only 8% of City firms. To market is cooling remains to be seen. Once again, it is
put this in some context, over two thirds of regional clear that price competition remains a point of focus for
firms see their biggest challenge as coming from internal many in the City and it is hard to see this changing in the
staff factors, while the City firms are much more focused near future.
on the political and economic environment that comes
with Brexit.

What do you think represents the biggest City Regional


challenge to your firms future success?

24%
Brexit
9%

The availability of high 12%


quality personnel 43%

The affordability of 8%
high quality personnel 22%

Price competition in the 20%


market place
9%

Government policy 20%


and the regulatory
environment 13%

16%
Other
4%
Perhaps unsurprisingly, Brexit has appeared as a there being little perceived impact. That said, it is
source of major concern for many firms. It is the City worrying that over one quarter of regional firms do not
firms that view it as the bigger challenge with 26% appear to have yet made any sort of assessment of the
considering it to be the greatest factor, compared to just impact of Brexit, compared to only 4% of City firms.
9% of regional firms. Although there will undoubtedly While the City will undoubtedly be on the sharper end
be opportunities for firms to advise clients on Brexit of Brexit, it is important that firms across the country
implications, competition will be fierce, and this will be ensure that they have at least thought about the
increasing the level of uncertainty for many. potential risks and opportunities so that they are not
left behind.
In contrast, regional firms that may not be so involved
in international work appear to be taking a business as Among the regional firms that are putting resource into
usual view with Brexit, or at least are just planning to assessing the future impact of Brexit, it appears to be
wait and see what happens. In any case, the next those firms that have a heavy bias towards residential
12 months will be an interesting time for all firms. and corporate property that are doing the most,
reflecting the nervousness that has already started to
It is not surprising to see that the greatest proportion of creep into those areas.
City firms view Brexit as posing an overall net threat to
their business, while regional firms tend more towards

How do you anticipate Brexit will impact


on your firm overall?

City Regional

It will represent 48%


a net threat
13%

It will represent 9%
a net opportunity 13%

It will have a little impact 26%


on the firm 48%

We havent yet made 4%


an assessment 26%

13%
Other
0%

This year, we asked participants for their views on In the face of this threat, the industry has also seen
emerging new entrants into the legal market. There specialism move in the other direction, with some law
was clear consistency between the view taken by the firms choosing to increase their financial expertise
City and that of the regions, with over two thirds of by hiring tax, accountancy and corporate finance
City firms citing other professional service firms as professionals, while also promoting senior finance
posing the greatest threat, and over half of the regional staff into partnership under the Alternative Business
firms agreeing. Structure (ABS) rules.

Since legislation changed a few years ago, many firms In any case, it is clear that the trend over the last decade
have expressed nervousness over competition from towards liberalisation of the legal market continues to
other consultants and professional services firms make law firms feel anxious about market share.
entering the market, most notably the accountants.

Benchmarking Report 2017 | 10


The 2011 introduction of the ABS saw a very gradual 13% of regional firms see this a threat. In a market that
increase in the number of non-lawyer owned firms in the has seen a recent rise in high end boutique law firms,
industry, rather than the seismic shift that some feared, this is perhaps not surprising.
and many of those that did apply for ABS licences did
so for evolution rather than revolution, for example, Our findings over the past few years have shown that
by bringing in the finance or HR director as an equity growth has generally been organic for law firms, though
partner. In short, the threat posed by supermarket law 18% of City firms still view acquisitive practices as
firms didnt materialise to the level some feared and so posing the greatest threat. This is not quite mirrored in
it is not surprising to see that only 5% of City firms and the regions, where only 9% cite this as the greatest risk.

Of the recent entrants into the legal market, which do you see as City Regional
posing the greatest threat to your market share?

Other professional 68%


service firms 52%

18%
Acquisitive practices
9%

ABSs / Supermarket 5%
law firms 13%

5%
Virtual law firms
4%

Private equity 0%
backed practices 13%

Availability of free 0%
online advice 9%

4%
Other
0%

There has been no great change in the profile of Bank overdrafts and other revolving credit facilities still
practice funding this year, with both City and regional form a large part of funding for many and this is a picture
firms seeing most of their finance coming from partner that has changed very little compared to last year.
capital, though there is still a large proportion of City
firms that count drawing restrictions and partners tax
reserves as a significant source of finance.
How is the practice primarily financed? City Regional
(% of firms that selected each response*)

Partner capital and 79%


long-term loans
80%
Partner tax reserves / 58%
restrictions on
partner drawings 32%

Bank overdraft / revolving 58%


credit facility
48%

21%
Bank short-term loans
24%

21%
Bank term debt
16%

8%
Other funding sources
20%

*more than one answer could be selected

Despite all of the uncertainties in the market, it is that all practices appreciate the importance of working
encouraging to see that firms acknowledge the capital management and, while headline performance is
importance of good quality, internal financial reporting. critical, this should never come at the expense of cash
stability.
Lock-up days top the list of the key performance
indicators for City law firms and, while this is also very Interestingly, City firms appear to place less importance
important for them too, the regional firms put their on fee earner performance and cost metrics, and more
emphasis on fee income per fee earner. It is important importance on senior partner performance.

Which of the following KPIs are most important to your practice?


(% of firms that selected each response*) City Regional

63%
Recoverability
64%
79%
Chargeable hours / productivity
52%
83%
Lockup (WIP and Debtor) days
64%
17%
Staff costs as % of fee income
44%
Contribution (gross profit before general 25%
overheads) per fee earner 20%

Net profit per fee earner 17%


28%
46%
Fee income per fee earner
46% 68%

Profit per equity partner 67%


40%

Fee income per equity partner 29%


8%

*more than one answer could be selected

Benchmarking Report 2017 | 12


Personal knowledge
Clients 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 share the
latest thinking with you and take you further.
Benchmarking Report 2017 | 14
Start the conversation

Louis Baker
Head of Professional Practices
louis.baker@crowecw.co.uk
+44 (0)20 7842 7161

Steve Gale
Partner
steve.gale@crowecw.co.uk
+44 (0)20 7842 7262

Ross Prince
Partner
ross.prince@crowecw.co.uk
+44 (0)121 543 1972

Ian Johnson
Director
ian.johnson@crowecw.co.uk
+44 (0)1242 240374

@crowecw
www.croweclarkwhitehill.co.uk
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