Improving fortunes for smaller legal firms as they close gap on big players

● Profits per partner figure of £69,000 has remained unchanged since 2014

Profits per partner at Scotland’s law firms have flatlined in the past three years, but smaller practices appear to be closing the gap on the larger players, according to a survey.

Thelawsocietyofscotland’s new financial benchmarking report has shown that latest profits per partner across all the firms which took part were £69,000, the same figure as the last survey of sector finances carried out in 2014.

But the report, published in association with Clydesdale Bank, also indicates that smaller firms are seeing improving profitability compared to their larger rivals.

Sole practitioners saw an increase in profits to £50,000 from £41,000 in 2014. Those with between two and four partners saw median profits rise by 11 per cent to £82,000 per partner and they were also largely found to be in robust financial health, with good bank balances and low debt.

However, the survey’s findings have highlighted some of the pressures facing firms in the five to nine partner bracket, with just a 4 per cent increase in median per-partner profits of £96,000. The findings also showed median bank balances at firms of that size were overdrawn by £2,000, falling from a credit balance of £30,000 in 2014. The society said although the result may reflect the financial health of the sample of partner firms that participated in the survey, it was “notable nevertheless”.

Bigger firms of more than ten partners which responded showed the highest profits per partner at £125,000. The society said differences in the respondent group since 2014 may account for the drop from £163,000 that year. The survey findings for 2017 have also highlighted the high staffing costs, at around 43 per cent of total income, indicating that large firms are not achieving the economies of scale that might be expected.

Graham Matthews, society president, said the fact that the sector was yet to see a return to the 2008 pre-recession median profit levels of £104,000 per partner highlighted the continuing impact of the lengthy downturn on Scotland’s law firms.

“As the legal market continues to evolve it is vital that our members take steps to ensure that they are effective business managers as well as excellent solicitors,” he said.

Sue Carter, UK head of professional services at Clydesdale Bank, said there are many positive indicators in the report but “the day-to-day challenges of generating new and profitable fee income, managing working capital and succession planning remain priorities”.