Profits in Scotland’s legal sector have fallen by over a quarter in the last ten years according to an adviser to the sector.
Accountants and business advisers French Duncan compared the most recent Law Society of Scotland Financial Benchmarking report for 2018 and compared it with the Society’s 2008 Benchmarks and Costs of Time survey (please see note below) and found that median profits per partner over the decade have fallen by 26.9% from £104,000 to £76,000 last year.
All sizes of firms have experienced a fall in median profits per partner with sole principals (single partner) down from £92,000 to £48,290; 2-4 partner firms down from £108,000 to £76,925; 5-9 partner firms dropping from £105,000 to £99,198; and 10+ partner firms falling from £221,000 to £173,824.
The profitability of firms in Scotland is lower than the rest of the UK. The RBS 2018 Financial Benchmarking survey indicates median profit per equity partner of £108,000.
In the 2008 report it stated that “the most profitable firms consistently achieve fees per partner better than £400,000 for firms with under 10 partners and over £800,000 for firms with 10+ partners.” By 2018 the highest income quoted in the survey in the 10+ partner firms’ upper quartile is £688,928 while the average upper quartile figure for firms under 10 partners is £333,877.
The 2018 report states that: “Taken together, the income and profit results suggest that firms are generating higher revenues through increased volumes of work, but that the work is less profitable. 10+ partner firms are able to absorb the less profitable work without the same impact on profit per partner as smaller firms.”
The median capital per partner has fallen substantially among the largest and smallest firms falling from £225,000 in 2008 to £96,545 in 10+ partner firms and from £63,000 to £23,276 for sole principals. Firms in between these two sizes have similar median capital levels across the ten-year period.
Worryingly bank balances ranged from £1,005 for the lower quartile sole principals to £1,083,513 for the upper quartile 10+partner firms.
John Anderson, Entrepreneurial Services Partner with French Duncan, explains: “The legal sector has faced some serious financial issues over the last decade and the market remains fiercely competitive. A decade ago, few would have predicted that law firms would go bust and yet we all know of the losses in the sector which have occurred over the last five years.”
“It is essential, therefore, that all of Scotland’s law firms ensure that they have systems in place to maximise their efficiency, maintain strong cash flow, and increase profitability. This involves implementing strong ‘good housekeeping’ practices and maintaining a sound grasp of the basic financial issues facing the sector. Focusing on costs and targeting key markets are essential to maintain profitability and the best firms are doing this while others may be struggling.”
Hazel Burt, Head of Personal Tax with French Duncan, commented: “For many equity partners in law firms managing their tax affairs efficiently and effectively is essential. Law firms are complex businesses and ensuring your tax is appropriately dealt with is vital particularly in a market which is tight and when profits fluctuate.”