Hain: higher expectations for equity partners

Fee income per partner at larger firms soared last year from an average of £777,000 to almost £1.4m, a survey has found.

Accountants MHA, who produce an annual benchmarking report, said the main reason was a fall in the number of equity partners at these firms, helped by an increase in profitable work.

“Last year we saw a lot of merger activity and some of this is now resulting in equity partner retirement without replacement. The profitable firms are choosing to share the improved results across a smaller group of individuals.”

Karen Hain, head of professional practices at MHA, said: “Larger practices have set tough targets for their equity partner group, and this has meant fewer promotions this year into equity, but also more leavers where performance has not been acceptable.

“Many large practices are putting in place non-lawyer senior management who are running the business as a corporate entity would, with new levels of expectations for equity partner functions.”

While law firms with more than 25 partners reported a 77% increase in fee income per partner, at firms with between 11-25 partners the annual average fell from £672,000 to £591,000. Firms with 5-10 partners did much better, up from £577,000 to £739,000.

However, the average fee income of sole practitioners last year was almost identical to the 2014 figure at £337,000, while at firms with 2-4 partners it fell from £513,000 in 2014 to £500,000.

In her introduction to the annual benchmarking report for 2016, Ms Kain said last year had been a “real period of growth” for law firms, with Brexit failing to unsettle the economy and a rising number of corporate transactions.

The larger firms fared much better, with total fee income at firms with more than 25 partners up from £15.5m to £18.6m, in firms with 11-25 partners from £7.2m to £7.8m and those with 5-10 partners from £3.5m to almost £4m.

Total fee income at the smallest firms fell slightly, from £345,000 to £337,000 for sole practitioners, and from £1.34m to £1.32m for firms with 2-4 partners.

There was worse news for the smallest firms in the figures for average profit per equity partner (PEP), which shrank last year for sole practitioners from £99,000 to £69,000, and for 2-4 partner firms from £105,000 to £95,000.

Ms Kain said the ratio of fee-earners to equity partners was increasing across firms of all sizes.

“Practices across the country have seen a rise in lock-up, as working capital is needed to pay new fee-earners and fund work in progress before bills are generated and paid.

“When a practice is busy with work, there seems to be a delay in billing fees, with no time to collect the debts. A good credit controller is worth their weight in gold.”

Ms Kain said the result of higher lock-up was the need for firms to find other sources of money, but funding from “traditional banking relationships” was declining and instead equity partners were being asked to foot the bill.

The report revealed a significant increase in the proportion of fee income spent on indemnity insurance. This ranged from 6.5% at sole practices last year, up from 4.6%, to 2.5% for the biggest firms, up from 1.8%.

MHA, a UK-wide association of accountancy and advisory firms, based its report on data from 117 law firms.

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