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UK fee-earner costs rose twice as fast as fee income in 2011

11 May 2012

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By Manju Manglani, Editor (@ManjuManglani)

Costs per fee earner rose by double the amount of fee income growth in 2011, according to a survey of small to mid-sized law firms in the UK.

Practice fee income grew by a modest one per cent year-on-year, while non-salary overheads per fee earner rose by an average of 2.6 per cent in 2011. Part of this increase may be due to the one per cent increase in employers’ national insurance contributions from 6 April 2011.

Just over half of participating practices awarded annual pay increases to fee earning and support staff. Only seven per cent of practices introduced performance-related pay arrangements for fee earners in lieu of an annual pay rise.

Median fee income per equity partner fell by 2.7 per cent, but median net profits per equity partner increased by two per cent.

The hottest practice area was corporate and commercial (up 11.6 per cent), followed by PI and clinical negligence (up seven per cent) and social welfare (up four per cent).

Growth was mostly flat in the property, employment, probate, other litigation and family law sectors. The worst performing named sector for respondents was crime, down 3.3 per cent year-on-year.

As a cost-cutting measure, a number of practices have outsourced back office functions. Nearly half of respondents outsource IT infrastructure and development, while a similar amount also outsource IT user support. In addition, the payroll function is outsourced by a third of respondents, while one in six practices outsource secretarial support.

Greater prudence on partner drawings, a desire to reduce third-party borrowings and new capital brought in by partners resulted in equity partner capital rising by 4.5 per cent in 2011, following a 7.3 per cent increase in 2010. The number of practices that were regularly operating near their overdraft limit fell from a third in 2010 to a quarter in 2011.

However, continued bank support came at the cost of increased security, charges or interest rate margins. Partners in approximately a third of practices now have personal guarantees in place, up from a quarter in the previous year, according to the report. In some cases, banks required practices to convert core overdrafts to long-term loans.

Exposure to higher rates of tax and more stringent debt repayment terms consequently caused two-thirds of respondents to convert to a limited liability partnership or incorporate into a limited company.

The survey by the law management section of the Law Society of England and Wales received responses from 181 member firms, of which 93 per cent have 25 partners or less.

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