Stronger than expected law firm performance during the pandemic
Solicitors maintained services to their clients through successive lockdowns and many reported solid business performance for the first year of the pandemic, according to the Law Society of England and Wales Law Management Section Financial Benchmarking Survey.
In its 21st year, the survey looks at how law firms fared through the pandemic, providing an overview of performance from 2020 to 2021.
Law Society of England and Wales vice president Lubna Shuja said: “Solicitor firms have demonstrated their resilience through 2020/21, using lifelines from government to retain staff and equipping them to support clients from outside traditional office environments.
“This survey highlights the range of vital activity, economic and social, which solicitors have continued to facilitate through the pandemic. It also provides insights into the drivers of success as firms look towards business in the new normal.”
Overall, 69% of participants reported year-on-year growth in fee income in 2020 with 40% seeing growth of more than 10%. Many firms performed well financially thanks to consistent demand during the pandemic, lower costs and support from government which helped them avoid job losses.
Median practice fee income increased by 6.2% (the largest increase for seven years) whilst median fee income per equity partner increased by 8.3%, from £761,981 in 2020 to £825,331 in 2021.
Total salary costs as a percentage of fee income fell by 2.9%. This is likely to have been influenced by a range of factors, including staff being furloughed for a greater proportion of the period, delays in awarding pay reviews and promotions, and fees per fee earner rising more than the increase in salaries.
After two years of decreases in equity partner profits, median net profit per equity partner increased by 39%. This was driven by a combination of increased fee income, particularly in residential conveyancing (+15.2%) and employment (+12.1%), furlough grants and other grant income, as well as a reduction in staff and other overhead costs (light, heat, repairs, etc).
In particular, the median spend on non-salary overheads per fee earner (everything except salary costs) reduced by 2.2%. Much of this was driven by a reduction in recruitment costs, marketing, and other premises costs.
IT spend increased as firms quickly had to enable their staff to work from home during the national lockdowns, in many cases accelerating existing plans.
Whilst the short-term financial impact of these measures has been felt in the 2021 results, firms will expect to see longer term financial benefits across other traditional overhead costs.
Analysis of data on overheads and profitability as a proportion of fee income suggests that for several years law firms have adapted how they work and where they derive value from their investments.
Firms are increasingly willing to invest in human capital growth, while controlling other costs more tightly to maintain profitability.
Impact of COVID-19
- 83% of participants reported they had furloughed at least some of their staff at some point during the 2020 and 2021 calendar years. The proportion of support staff placed on furlough was higher than the proportion of fee earners
- 13% of firms in the survey had made use of local authority grants, with an average amount received of £27,000
In relation to tax:
- 79% of firms deferred the payment of their VAT liability
- 12% of firms were able to agree time to pay arrangements with HMRC to defer or spread the payment of PAYE/NIC due on monthly salaries
- 44% of self-employed sole practitioners or partners in partnership/LLP participant firms deferred tax payments
- 12% of the limited companies were able to negotiate time to repay their corporation tax bills
- 74% of participating firms had borrowed monies through either the Bounce Back Loan Scheme or Coronavirus Business Interruption Loan Scheme.
Overall, many of the firms taking part in this year’s survey saw stronger than expected levels of performance for 2021. The challenge for many firms will be in maintaining the increased levels of profitability over the coming months and years.
Key to this is getting the most from staff, providing the best possible client service efficiently and charging for it accordingly, whilst making sure working capital is being managed.
Paul Bennett, chair of the Law Society’s Law Management Section said: “The pandemic posed huge challenges for law firms in terms of supporting clients through the most challenging period since the 1940s.
"Some law firms did exceptionally well, others struggled – to some extent this was likely dependent on which sector or client group they supported.
“Those firms with good habits around client service, good practice that engendered trust at a critical moment in history and the ability to offer the right expertise for the moment did well. Therefore, we celebrate those who thrived.
"Good management should be welcomed, lessons learned shared to help other firms and of course those they supported will recognise the exceptional support from trusted professionals.”
Becci Wicks, regional director for London at Lloyds Bank Commercial Banking, said: “The Law Society’s annual benchmarking survey always provides an insightful temperature check of how firms are faring, something that's even more important now as they eye new opportunities in the wake of restrictions lifting.
“It’s a privilege to sponsor the survey again and to support the sector as it targets further growth. These latest findings reveal the sector’s resilience which provides optimism for the future.
"We look forward to remaining by the side of law firms throughout the coming months, and providing them with the necessary funding and guidance to unlock their ambitions.”
Notes to editors
*Super profit is the profit in addition to a return on the partner’s capital invested in the practice, a benefit received for the additional risk they face through being business owners rather than employees.
A webinar on the survey findings will be held at 10am on Friday 29 April. Find out more and book your place
Firms who would like to register their interest to participate in the 2021/22 survey can contact firstname.lastname@example.org
The Financial Benchmarking Survey 2022 is written and produced by the legal team of Hazlewoods LLP for the Law Society Law Management Section and sponsored by Lloyds Bank Commercial Banking.
In its 21st year, the survey for 2021 collected financial data from 206 firms, with a combined income of over £1.1billion, making the survey one of the largest of its type in England and Wales.
The report contains financial data from the last two financial years: 2020/21 (2021) and 2019/20 (2020) April to March and provides insight into how organisations can use data to improve performance.
Key findings from the report
- Whilst fee-earner head count was similar to the previous year, staff costs decreased – the median cost of a fee earner (including fixed share partners and notional salaries for equity partners) fell by 2%
- The number of support staff fell by 2.5%. The median cost of support staff – including secretaries, reception, HR and accounts decreased slightly, from 18.6% to 18.1% of fee income
- Median spend on non-staff overheads per fee earner (everything except salary costs) decreased by 2.2%. This was driven by decreases in marketing, recruitment costs and other premises costs
- The net profit margin increased from a median of 18.9% to 23.8%. As a result, median net profit per equity partner (before notional salary) for participating practices, increased – from £146,417 in 2020 to £203,199 in 2021, an increase of 38.8%
- In addition, median ‘super profit’* per equity partner was £102,097 (adjusted net profit figure to include cost for equity partner and notional interest on partner capital), an increase of 93% on 2020 figures. Firms in all turnover bands have seen an increase in super-profit, although the change in the median in firms in the £5m-£10m turnover band is lower than the median in the £2m-£5m turnover band
- Total year end lock up days (WIP and debtors combined) dropped from 142 days to 135 days and median equity partner capital (combined total of capital account, current account, and tax reserves) rose by 13.2% to £225,250
- The median hourly cost of a fee earner (based on 1,100 chargeable hours per year), was £110.63, median fees per hour were £122.54
- The median cost of a fee earner, including fixed share partners and notional salaries for equity partners fell by 2.6%, from £57,894 in 2020 to £59,438
- Of the 206 practices across England and Wales taking part in the research, the regional break down was as follows:
- Eastern: 18
- Greater London: 42
- Midlands: 33
- North East: 6
- North West: 14
- South East: 30
- South West: 46
- Wales: 8
- Yorkshire: 9
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Press office contact: Ruth Murphy | 0208 049 3879