Profit falls the 'new normal' for high street firms

Stagnant fee income and declining profits are likely to be a fact of life for most high street firms for years to come, according to a recent report.

“Recent analysis has shown that the economy of the UK and the economy of law firms have both become static: there has been no real rise in fee income and most law firms have suffered a fall in profits during this period,” according to NatWest’s 2013 financial benchmarking report.

The report’s authors went on: “There is no real prospect of the situation improving significantly over the next few years and this environment is perhaps the new normal.”

Published earlier this week, the report surveyed 337 smaller firms in the UK, using figures taken from their 2012 financial year.

The firms were divided into two groups: larger ones, whose income was more than £1.5m, and smaller one, whose income was less that £1.5m.

Altogether, these firms had a combined fee income of £1.05bn for combined profits of £247m. Collectively they employed 15,200 people, including 1,834 partners.

Steve Arundale, head of professional sectors and financial institutions, NatWest business and commercial banking (pictured) said: "These firms are clearly at the frontline in respect of the operational challenges associated with legal sector reform and the consequences of an economic slowdown that has certainly outstayed its welcome."

At £393,000, the media fee per equity partner was up two per cent on the previous year, while the median fee per fee earner was £132,000.

The median profit per partner (PEP) also went up – six per cent – but there was significant disparity between larger and smaller firms, and between London and regional firms.

Median PEP was up 18 per cent in smaller firms but only two per cent in larger ones, although the PEP figure was double in larger firms: £118,000 compare with £90,000 in smaller firms.

“If fair remuneration for an equity partner was £80,000, then it could be observed that the average firm was making virtually no real profit,” the report said.

The level of profit as a percentage of fees provided a degree of comfort. It stood at 23 per cent, which was deemed to be in line with pre-recession data, showing the legal sector “to be in good health”.

The report said firms should focus on increasing profitability now, and scale up and grow when they have a good profitable business in place.

It warned that most firms were struggling to achieve three times salary costs and as a consequence both their gross and net profits were falling.

“Firms tend to talk about what they’re good at and try to get even better at this, rather than focusing on areas of under-performance where improvements might more easily be achieved,” the report suggested.