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Benchmarking
2017
Providing clarity in the legal sector
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
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%
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
80,000
66,400
66,400
60 60,000
39,700
38,400
42.8% 42.4%
20 20,000
0 0
2017 2016 2017 2016
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
92% of firms
of firms that grew,
grew by more than 10%
experienced growth
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
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.
24%
Brexit
9%
The affordability of 8%
high quality personnel 22%
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
City Regional
It will represent 9%
a net opportunity 13%
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.
Of the recent entrants into the legal market, which do you see as City Regional
posing the greatest threat to your market share?
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*)
21%
Bank short-term loans
24%
21%
Bank term debt
16%
8%
Other funding sources
20%
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.
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%
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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