Survey reveals strong law firm performance during pandemic
Median fee income per equity partner increased to £825,331 in 2021
According to the Law Society’s law management section Financial Benchmarking Survey 2022, the performance of law firms was stronger than expected during the pandemic.
The survey collected financial data from 206 firms, with a combined income of over £1.1bn. The report contains data from the last two financial years: 2020 - 21 (2021) and 2019 - 20 (2020), April to March.
69 per cent of firms reported year-on-year growth in fee income in 2020; 40 per cent saw growth of more than 10 per cent. Many firms performed well financially thanks to consistent demand during the pandemic, lower costs and support from government which helped them avoid job losses.
83 per cent of participants had furloughed at least some staff at some point during 2020 and 2021. The proportion of support staff placed on furlough was higher than the proportion of fee earners.
13 per cent of firms had made use of local authority grants, with an average amount received of £27,000.
Many firms had sought tax relief:
· 79 per cent had deferred the payment of VAT liability;
· 12 per cent agreed time to pay arrangements with HMRC to defer or spread the payment of PAYE/NIC due on monthly salaries;
· 44 per cent of self-employed sole practitioners or partners in partnership/LLP participant firms deferred tax payments;
· 12 per cent of limited companies were able to negotiate time to repay their corporation tax bills;
· 74 per cent of participating firms had borrowed monies through either the bounce back loan scheme or coronavirus business interruption loan scheme.
Median practice fee income increased by 6.2 per cent – the largest increase for seven years. Median fee income per equity partner increased by 8.3 per cent, from £761,981 in 2020 to £825,331 in 2021.
Median spend on non-salary overheads per fee earner (i.e. everything except salary costs) reduced by 2.2 per cent. Much of this was driven by a reduction in recruitment costs, marketing and other premises costs.
IT spend increased as firms had to facilitate home working. While the short-term financial impact of these measures was felt in the 2021 results, firms should see longer term financial benefits across other traditional overhead costs.
Analysis of data on overheads and profitability as a proportion of fee income suggests 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.
Total salary costs as a percentage of fee income fell by 2.9 per cent. 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 per cent. This was driven by a combination of increased fee income, particularly in residential conveyancing (+15.2 per cent) and employment (+12.1 per cent), furlough grants and other grant income, as well as a reduction in staff and other overhead costs.
Law Society 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.”
The challenge for many firms now will be in maintaining the increased levels of profitability over the coming months and years.
Paul Bennett, chair of the Law Society’s law management section, said: “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.”
The 2022 survey was written and produced by the legal team of Hazlewoods LLP for the Law Society law management section and sponsored by Lloyds Bank Commercial Banking.
The full Financial Benchmarking Survey is available here.
A webinar on the survey findings will be held at 10.00 - 11.00 on Friday 29 April.