As an added value part of our compliance service for annual accounts and tax, we supply our law firm clients with a bespoke individual benchmarking report which analyses the results of their firm for the year and also compares their performance against other firms. Our clients find the report immensely useful when discussing their annual accounts, as it allows us to focus more on their strategy looking forwards, rather than the numbers in their historic accounts.
Each year we summarise the results of these practices in our annual benchmarking review. This review covers firms of all sizes, throughout the UK. Where possible the results are analysed by practice size. The practice size is determined in terms of the number of full equity partners within firms, excluding fixed share equity partners and salaried partners. We classify firms with 1-7 full equity partners, as being small and those with 8+ full equity partners as large, in reality, law firms with 8+ full equity are very much at the larger end of the legal market given the demographics of the sector.
The key highlights from our 2021/22 annual review were as follows:
The average fee income per equity partner was £842,000 which was 10% higher than in 2020/21.
The average fee income per fee earner was £133,000 which was 5.3% lower than 2020/21.
The average net profit per equity partner was £199,000 which represented 23% of fee income. This had increased from £185,000 in 2020/21.
On average there were 5.9 fee earners for every equity partner.
We have now completed a mid-year benchmarking review based on data we have for the year to date, and we have seen the following key trends so far for 2022/23:
Based on data we have for the year to date we have seen the following key trends:
Fee income
Fee income per equity partner has increased substantially by 21% from 2021/22. With average fee income per equity partner now at £1.02m, this is the first time that average fee income per partner has surpassed £1m in our benchmarking data. This average fee income rise is most notable in law firms with 1-7 partners with the average fee income per partner of £1,047,000 compared to £861,000 in 2021/22.
Fee income per fee earner has also increased by 10% upon last year. The average fee income per fee earner is now £146,000.
Net profit
Net profit per equity partner is currently £204,000 which remains comparable with the previous year having only increased by £5,000 (2%) from 2021/22. However, there is a widening difference between net profit by partner in the different sized firms. Net profit per equity partner is £188,000 (2021/22 - £192,000) in firms with 1-7 partners compared to a figure of £310,000 (2021/22 - £244,000) in firms with 8+ partners.
Net profit % has overall fallen from 36.9% in 2021/22 to 26.3% for 2022/23. This fall is solely in smaller firms where NP% is down 12.5% to 24.7% compared to larger firms where NP% has increased slightly from 35.0% in 2021/22 to 36.9% in 2022/23.
People
On average for 2022/23 there are 6.9 fee earners for every equity partner across all firm sizes. Firms with 1-7 partners show an increase in the ratio from 6.1 to 7.3, but with larger firms (8+ partners) there is a fall from 4.7 to 4.5. The figures continue to show that firms with a smaller number of partners have more fee earners per equity partner compared to the larger firms. This seems a little counter-intuitive, but may be because smaller firms have restricted the number of equity partners to protect profits per partner, and an increasing number of employees not wanting to take on the risk of ownership, particularly in smaller firms. We are also seeing an increasing number of partners leaving larger firms to set up in practice themselves, especially in niche markets. As these firms grow they tend to take on more fee earners to support founding partners rather than add to equity partnership.
Overall staff costs as a percentage of fee income have increased from 39.1% to 41.5% across all firms. The percentage in firms with 1-7 partners has increased from 39.0% in 2021/22 to 42.2% in 2022/23 however percentage costs have fallen slightly in larger firms from 39.5% to 37.4% for the same periods. This reduction in staff costs for larger firms won’t be driven by falling salaries (quite the reverse!) but rather by increasing fee income. However, the rise in staff costs for smaller practices does follow the trend that we are currently seeing in that firms are having to offer higher market salaries in order to recruit fee earners, whereas larger firms already tend to offer attractive remuneration packages.
Overheads
Rent and rates as a % of fee income has decreased from 4.4% in 2022/22 to 3.9% for 2022/23. This again follows the trend for firms to actively reduce office space and in some cases close branch offices as a result of more hybrid and home working.
PI insurance as a % of fee income has seen another rise this year to 4.4% from 4.2% in 2021/22. This follows recent research published by the SRA and Legal Services Board (LSB) which found that the average PII premium for law firms is now equivalent to 5% of a law firm’s annual turnover.
However, there is a widening disparity between smaller and larger firms, practices with 1-7 partners on average have PI costs at 4.6% of fee income, with some smaller firms with property exposure having premiums in excess of 10%, but firms with 8+ partners have a much lower percentage of 3.1% for 2022/23 so far.
Marketing spend as a % of fee income has increased from 1.7% in 2021/22 to 2.1% in 2022/23. Marketing events have been restricted in previous years, but this increase shows that firms are now increasing the number of in person events and meetings and trying to move away from the online events that we have become accustomed too lately.
Another key trend to emerge this year is the rise in technical and training costs as a % of fee income as overall this has increased to 1.8% in 2022/23 from 1.5% in 2021/22. These costs tend to include online subscription costs for libraries but also training costs for courses and programmes. We have seen large shift in firms actively increasing training and development expenditure to invest in employees help with staff retention.
In summary the benchmarking results for 2022/23 to date are highly encouraging with both smaller and larger firms showing strong performance particularly with fee income. Smaller firms are currently being impacted to a greater extent by wider economic pressures such as rising staff and PI costs, so it will be interesting to see how these are controlled and as we move forward.
If you are interested in seeing how your firm compares with the benchmarks in this report or want to further investigate variances with your own firm's performance then please contact us.
