Sector trends

Legal sector: financial benchmarking results for 2019

Robert Mowbray, author of the NatWest Legal Benchmarking Report 2019, discusses some of the key trends and financials among law firms.

What were the significant findings of this year’s NatWest Legal Benchmarking Report?

“The profession is still growing. Common measures, such as the annual billings of a partner and their team, have jumped by £40,000 to £608,000. On the back of that, there’s been a significant increase in the profit per equity partner (PEP), which has leapt £20,000 to £128,000 – about a 20% increase. That’s very positive.

“What has concerned me for the past three years is that the margin has dropped. People may be running a bigger business and creating more profit, but the profit margin is falling. This year, it’s down to 21%. When we first started the benchmarking seven years ago, it was 25%, so the profession’s ability to turn fee income into profit is reducing every year. That’s why firms should continually think about productivity.

“Currently, growth is entirely down to employing more people and not people creating more. Firms are also finding it difficult to increase the price of what they do. For some, the rate is dropping.

“How do you improve productivity? It’s partly about being more sophisticated around pricing; it’s talking to people about other ways of charging that the client might like rather than just charging for time, which they dislike. It’s also about doing the work more efficiently. That requires investment in both tech and training, depending on the type of work firms do.”

What other significant developments have occurred in the past year?

“The other significant thing is that the median lock-up – the time from recording an hour to getting paid for it – has for the first time dropped below 100 days. That’s a real landmark. It’s heading in the right direction. I will say lawyers shouldn’t get complacent, though – it still takes more than three months from doing an hour’s work to getting paid for it.

“There’s no reason why it should take that long. I hope people will now think they can do better and get it down to 90, 80, or 70 days by focusing on doing things like asking for money upfront, being more disciplined about billing everything monthly and not being distracted by other short-term demands on their time.

“When I first started working in the sector 30 years ago, it was taking 200 days. And over many years, it has come down to four months, or 120 days, which is significantly better than it was.

“Professional people don’t focus enough on the cash flow, and there will always be casualties, and law firms will fail. If you have poor cash flow, you run out of money and you can’t continue.”

How is Brexit affecting the legal sector?

“It’s hard to say what impact, if any, Brexit has had because we don’t know what the outcome is going to be yet. But growth in law firms has been just as good in the past year as it has been in previous years.

How do you improve productivity? It’s partly about being more sophisticated around pricing; it’s talking to people about other ways of charging. It’s also about doing the work more efficiently

Robert Mowbray
Co-owner, Taylor Mowbray

“However, with uncertainty and change, there’s going to be more demand on lawyers’ services. It depends on the type of work you do. If you’re a lawyer who’s doing transactional work that’s reliant on confidence in the economy, you may see a slight slowdown. However, if you’re someone who advises on contracts, and the consequences of what may happen after Brexit, you’ll probably be very busy as clients ask about the validity of contracts.”

What other challenges face the sector over the next year?

“I think the biggest challenge is resourcing. The profession is relying on good people coming in to deal with growth because there isn’t a boost in productivity. But virtually every firm will say it’s struggling to attract exceptional people. There are clear signs those good people can demand high rates of pay. If you’re in a big city like London, where you are competing with potentially hundreds of other firms, it’s seriously challenging to recruit outstanding people.

“Artificial intelligence (AI) is also an issue. There are some things that lawyers have done in the past and charged on time for that they won’t be able to do in the future because technology will do those things for them. Firms will need different charging models because there isn’t a lawyer who’s spending time on it. In the long run, AI will boost productivity because the payroll cost has gone, but you’re still providing a service that has value to a client.

“Historically, there was an employee paid X pounds per hour, who then charged a client Y pounds per hour. Firms understood how they made money out of it. As we move to AI, there’s the potentially huge upfront capital cost of buying the tech to operate that way, with no certainty of income coming back. When it’s up and running, how do you charge for it? It’s early days, and I don’t think there is an established market practice yet as to how you charge for it.

“Cybercrime is another big issue for the sector. There are increasing examples of firms that have got in a mess because of hacking. Client data has got out into the public domain – a significant problem for a firm. More worrying still, because firms hold so much client money, if funds are stolen, that could end the firm because people wouldn’t trust it any more.

“Finally, the legal sector is more regulated, and there’s a cost associated with it. We’ve now hit a point where firms question doing a piece of work if the fee is going to be less than a specific monetary amount because there’s a cost to opening a file, doing all the compliance and administration and getting a bill out. If you can’t charge a certain amount, you’ll never make any money on it.

“Among all these challenges, different firms are affected in different ways.”

What have been the long-term trends you’ve discerned since you started compiling the report in 2013?

“Year on year, you see smaller marginal changes. But over that period, inflation has gone up by 10% or 15% – depending if you look at the retail prices index (RPI) or the consumer prices index (CPI) – and logically you expect profit PEP to go up by that amount. Well, it’s gone up by 42%, and the profession should be proud of itself for increasing PEP higher than inflation in a competitive market.

“But if you then look at how they’ve done it, they’ve increased the profit by 42% by increasing the fees per partner by 55%. In other words, they have to run harder to create more profit. If you then look at fees per fee earner – they’ve only gone up by 2% since 2013. All the growth is coming from having more lawyers and not productivity.”

Download the 2019 Legal Benchmarking Report

Report (PDF, 7,178KB)

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