UK Law Firms’ profits per partner continue to grow

The 15th annual law firms survey from PricewaterhouseCoopers LLP shows that virtually all of the UK’s Top 25 law firms continue to record strong growth in profits, as total fee income has increased and restrictions on equity partner numbers have been maintained.

The 2006 survey highlights a “benign and favourable economic environment” that has enabled more than 65% of the Top 25 firms to grow fee income by over 10%, with some achieving more than 20%. As a result, all of the Top 25 respondents to the survey increased their profits per partner, with 30% recording growth of more than 20%.

However, despite the growth in fees and average profit per partner, profit margins remain under pressure due to continuing low levels of staff utilisation (relative to last year and target), continued salary pressures and high levels of qualified staff turnover.

Alistair Rose, leader of the professional partnership advisory group at PricewaterhouseCoopers LLP said:

“The survey results show that 2006 has been an exceptional year for many law firms and a key driver of the high level of growth in profits per partner has been the continued restriction on equity partner numbers. More than half of the Top 25 reduced the number of their equity partners, an indicator of a real focus on maintaining growth in profits per partner at the expense of broadening the partnership. Interestingly, however, among the Top 10 law firms, just over half increased their partner numbers this year, reversing the falling trend of the last couple of years.

“Given the profitability growth reported by firms, it is surprising that levels of chargeable hours, per member of staff, have fallen by an average of 3% for the Top 25. Again, firms are failing to achieve target utilisation. At the same time, staff turnover levels are also still high, averaging up to 20% for some Top 25 firms. There are clearly work-life balance issues involved here, combined with the increasing restrictions on equity partnership as an achievable career goal.”

On the subject of salary increases, the survey indicates that the most significant have been targeted at the three to five year post qualified experience (pqe) range while there is evidence of more flexible benefits and working arrangements. However, firms are struggling to introduce specific targeted bonus arrangements and this is an area where management teams need to focus, given the costly attrition rates many are experiencing.

International expansion has again featured in 2006 with over half the Top 25 reporting increases in their overseas revenues of more than 15%. This is, however, lower than previous years as firms seek to consolidate their overseas operations. Not surprisingly, the largest firms have the most established overseas operations with six of the Top 10 now generating more than 30% of their income from those sources. China is attracting most attention with three quarters of the Top 25 having at least one wholly-owned office there.

Commenting on the outlook for the law firms, Alistair Rose of PricewaterhouseCoopers LLP, concluded:

“Firms are again budgeting for a strong performance in 2006-2007, with more than 80% in each size category assuming a rise in profits per partner and an increased number of fee earners. The strong financial performance per partner is also not necessarily seen as sustainable as a larger number of firms in the Top 25 are predicting an increase in their partner numbers, although the Top 10 remain more conservative, with only half expecting to have more equity partners but a large majority expecting more fixed share partners.

“Given that average fee income for the Top 25 law firms has grown over the last three years by 48% while average partner numbers have risen by only 1%, managing partners will need to consider whether this model is sustainable, especially given the pressures on staff utilisation and retention rates.”