Firms struggle to convert revenue into profitability

Law firms are struggling to convert increased revenue into increased profitability, according to a national audit, tax, and advisory firm.

Crowe Clark Whitehill's annual law firm benchmarking report shows that although 2015 has seen a number of firms reporting successful results, it has not all been plain sailing.

Over a quarter of firms saw their overall profit pool decrease, including 30 per cent of regional firms and 21 per cent of City firms.

The impact has been felt through to profit per equity partner (PEP), with 38 per cent of firms experiencing a decrease, including 46 per cent of City firms and 30 per cent of regional firms.

For firms that grew PEP, regional firms performed better, with 43 per cent increasing PEP by more than 15 per cent, compared to just 25 per cent of their City counterparts.

For the second successive year, the proportion of firms reporting increased fee income has increased to just below 85 per cent, up from 76 per cent in 2014, and 60 per cent in 2013.

Commenting on the findings Louis Baker, head of professional practices at Crowe Clark Whitehill, said: 'Although the growth of the top-line is encouraging, firms have clearly faced considerable challenges in translating this to the bottom-line profit growth.'

As anticipated in the 2014 report, total headcount at both City and regional firms has increased by 4 per cent. Notably, regional firms have kept a tighter rein on partner numbers, increasing by just 1 per cent compared to less than 3 per cent in the City.

A predicted pressure on salary levels has also been realised, with regional firms having to do more to ensure they attract and retain staff. Average employment cost per head in the regionals increased by 3 per cent, a point more than City practices.

Looking forward, 2015's benchmarking exercise also revealed that 2015/16 might bring more merger activity within the legal sector, particularly with the regional firms, 30 per cent of which see a merger being 'likely' in the coming year.

City firms, however, were more cautious with their predictions. Only 11 per cent are considering the option of a merger as 'likely'.

By contrast, a recent study by legal PR firm Byfield Consultancy and City firm Fox Williams found that 95 per cent of managing partners at the UK's top 200 law firms predicted 'massive consolidation' of the legal market, which would take place over the next two years.

In addition, new figures released today show that long-term lending to UK firms has risen to £7.35bn, fuelled by a need to fund M&A, overseas offices, and lateral hires.