Editor's blog | The new normal

Life on the legal high street during the recession hasn’t been so bad after all, it seems. Fees per equity partners in smaller firms rose by 2 per cent last year, and profit by 6 per cent. Profit as a percentage of fees stood at 23 per cent, which is in line with pre-recession figures and suggests that five years into the downturn, law firms have been resilient.

These are some of the findings in last week’s NatWest benchmarking report. The bank canvassed 337 firms around the UK, whose total combined income was £1.05bn and which, altogether, employed about 15,200 people. So, while this is not a comprehensive survey, it ought to give a reasonably fair snapshot of the situation. And interestingly, it only canvassed small and medium-sized firms rather than the top 100, whose financial health is under more regular scrutiny.

But these figures aren’t exactly uplifting, particularly when you consider the inflation rate, which fluctuated between 2 and 3 per cent in 2012. Or the fact that, according to the Financial Times, real incomes in Britain have dropped 6.3 per cent in the past five years. Worse, the survey contains distinctly uncomfortable results. Firms are failing to achieve the “traditional” – according to the report – fee multiple of three times the salary cost of fee earners, resulting in a fall in their gross and net profits. There are sharp differences between firms depending on size, too. Smaller firms, defined in the report as those with a turnover of less than £1.5m, have increased their median profit per equity partner (PEP) by 18 per cent – significantly more than the two per cent achieved by the larger firms. But the larger firms have a PEP figure double that of the smaller ones. Smaller firms also have a lower recovery rate per hour (£119 compared with £151 for larger firms).

In the main however the firms that took part in the survey appeared to be reasonably well managed financially, even where improvements could be made to gearing, fixed fees, billing, work-in-progress days, or lock-up. What the survey doesn’t say of course is: what about the firms that didn’t take part? There are hints in the report that for some the situation could be dire. Larger firms in the South East, for instance, had borrowings in excess of real partner capital. But the real problem behind these figures is not one of management: in some cases, the work is simply not there. The much-publicised threats over the survival of ten-partner firm Atteys Solicitors, in Yorkshire, is a sad illustration: a firm with a user-friendly website, membership of the Quality Conveyancing Scheme, and Lexcel accredition, is facing closure. The hidden reality behind the report is that we may have to prepare for more closures before the sector finds its feet again. As the report’s authors acknowledged: “There is no real prospect of the situation improving significantly over the next few years and this environment is perhaps the new normal.”