Law Society: Covid boosted finances – and firms’ willingness to change

Accounts: Greater financial stability

The pandemic has taught many small and medium-sized law firms about the benefits of delivering services that suit their clients, rather than themselves, Law Society research has found.

Covid proved an unexpected financial boon after the initial gloom, with 69% of the firms that took part in the law management section’s annual financial benchmarking survey reporting year-on-year fee growth in 2021, with 40% seeing growth of over 10%; 75% saw profits increase.

“Our experience is that many firms have continued to see strong financial performance into 2022, as workflow remains strong in most areas,” the study said.

“However, the challenge is going to be maintaining the increased levels of profitability over the coming months and years.”

There were pressures to raise salaries to retain and attract staff, along with large increases in professional indemnity insurance premiums and the rise in employer national insurance earlier this month.

The report, drafted by accountants Hazlewoods, found “genuine belief that the new efficiencies that remote working can bring are real”, along with a recognition that staff wellbeing and motivation was higher where there were offered more flexible working arrangements.

It said Covid has shifted client expectations “away from what can be long face-to-face meetings every time, and more towards swifter overall service levels”, with people’s greater use of technology paving the way for “greatly improved ways of both sharing and executing legal documents electronically”.

Further, communication methods have become more auditable, with improved electronic working, “thereby improving service levels and reducing risk”.

The pandemic has ushered in greater willingness in law firms to try new approaches, “and as a result, belief has accelerated that they can give rise to efficiency gains, better service and a generally improved working life”.

The report concluded: “Many firms are now starting to focus on designing client experiences to actually suit the client, and not just to suit themselves, and in doing this are finding that delivering services that suit the client better are actually more efficient anyway.”

The report, now in its 21st year, is one of the largest of its type, the 206 law firms taking part comprising almost 12,500 partners and employees with a combined fee income of £1.1bn.

Fee income increased by a median of 6.2% between 2020 and 2021, the strongest growth for seven years. Firms across all regions of England and Wales experienced the growth, and fees were up in most work types too, especially residential conveyancing and employment.

“In our experience, most conveyancing firms increased their fee rates several times during 2021 and have not reduced them since,” researchers noted.

Salary costs as a percentage of fee income fell, which the report attributed to furlough, delays in awarding pay reviews and promotions, and fees per fee-earner rising by more than the increase in salaries.

Non-salary overheads as a proportion of fee income also fell, with cuts in marketing, accommodation and other premises costs.

While median fee income per equity partner rose 8.3% in 2021 to £825,331, the median cost of a fee-earner was up only 2.6% to £59,438.

Median spend on support staff dropped marginally to £23,957 per fee-earner, while the median spend on non-salary overheads per fee-earner rose 2% to £38,293. As a proportion of fee income, non-salary overheads reduced from 30% to 28%.

Total year-end lock-up days (WIP and debtors combined) also fell, from 142 days to 135.

The median hourly cost of a fee-earner (based on 1,100 chargeable hours per year) was £110.63, compared to median hourly fees of £122.54.

Median net profit per equity partner (before deducting notional salaries for partners) jumped 39% to £203,199; adjusted to include a notional salary cost and also notional interest on partner capital, to create the ‘super profit’, the figure nearly doubled over the previous year to £102,097.

Just 11% of firm reported a ‘super loss’ in 2021 – the lowest seen for many years.

This all meant that firms’ financial stability has improved significantly – partners’ total drawings exceeded profits in only 11% of firms in 2021, compared to around a third in each of the previous four years.

Some 83% firms claimed furlough money and 11% of them either have or intended to repay it. Three-quarters borrowed money through either the Bounce Back Loan Scheme or the Coronavirus Business Interruption Loan Scheme – the median amounts were £50,000 and £350,000 respectively – but many firms have still not used the money, preferring to hold onto it ‘just in case’.

The report said some firms used the money to fund their professional indemnity premiums, as the interest rates were generally lower than more traditional funding options.

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