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The annual survey finds healthy fundamentals within legal firms.
Last updated: 21 Jul 2020 4 min read
In a year when Brexit again dominated both the economic and political landscape, the legal sector continued to show encouraging growth rates in 2018, which are consistent with previous years. The encouraging signs, as recorded in Royal Bank of Scotland’s 2019 Legal Benchmarking Report, are welcome news to Dave Weaver, commercial head of professional services at the bank.
“It’s pleasing to see that, despite various headwinds, the legal sector is in good health, demonstrating growth at a rate consistent with previous years,” he says. “The report highlights that average fees per equity partner now stand at £608,000, an increase of over 7%, or £40,000, from the prior year, which materially outstrips inflation. And average profit per equity partner (PEP) now stands at £128,000 which is £20,000 higher than the figure reported in the 2018 survey.”
And there has been an equally welcome landmark for the survey in the seven years since its inception: lock-up has fallen below 100 days for the first time, to 99 days.
Despite the positive news, the report suggests firms need to focus on profit margins, which have fallen to an average of 21%. “The growth in PEP is coming from an increase in volume, which has been reduced by a fall in efficiency,” explains Weaver. “The increased cost of regulation appears to be having an impact, too. In this sense, I would argue the legal profession is slipping backwards in a competitive market. Even if firms are still growing, they will struggle to make more money if profit margins reduce. Given that this appears to be a definite trend, firms should be looking more closely to understand this. Operating in a lean and efficient way and focusing on lawyer productivity should be high on the agenda for all firms.”
This year, Royal Bank of Scotland provided participating firms with their own individual report, but any legal business can use the main report’s findings to benchmark its own performance against the wider market.
“Even if firms are growing, they will struggle to make more money if profit margins reduce. Given that this appears to be a trend, firms should be looking more closely to understand this”Dave Weaver, commercial head of professional services, Royal Bank of Scotland
Weaver explains: “When benchmarking your own firm’s performance, I would say it’s unrealistic to expect to be upper quartile in everything, and it’s important to focus on finding areas where you’re perhaps underperforming versus your peer group and focus your efforts on becoming better in those areas.
“That’s where your opportunities will lie. And I would stress that a few focused improvements can quickly lead to a significant improvement in performance and cash flow.”
News in the first quarter of 2019 shows that the world may be entering recession, with less-than-encouraging signs from both China and Germany. This might have an immediate impact on firms because the sector prospers most on the back of a buoyant economy, an active housing market and strong business confidence.
“In many ways, the issues the sector faces are no different from other industries, and the demand for legal services relies on the success of other sectors of the UK economy,” adds Weaver. “Brexit is a good example of that and illustrates how the sector is intrinsically linked with wider sector dynamics and economic challenges.”
Beyond the B-word, and the state of global economics, Weaver is keen to stress that firms should monitor a number of situations in the coming months.
“There are a number of key topics that continue to impact the sector, including the threat of cyber attacks, the adoption of AI, the increasing trend of alternative business structures and the challenge of attracting and retaining talent. This year, the report asked respondents how their own firms are likely to be impacted by these themes. What is clear is that there is a significant variance of views, and what one firm might see as a threat could be viewed by another as an opportunity.”
For the full report, click the link below.
Professional Services, Reports