Winkworth: Fundamentals still matter most
SME law firms performed strongly last year, making good profits without relying on client account interest and controlling their overheads well, according to new research.
But these gains could be “fragile”, bosses were warned, with fee-earner productivity still below potential and lock-up a continuing problem.
The annual financial benchmarking survey conducted by accountants Hazlewoods for the Law Society’s leadership and management section covered the 2024-25 results of 121 law firms, two-thirds of which had a turnover of less than £10m. All numbers cited below are the median figures.
Practice fee income increased by 11.2% in 2025, nearly double the previous year and the highest rate in over 15 years.
Some 85% of the firms reported year-on-year fee growth in 2025, with 22% of them reporting at least 20%.
The last time the research uncovered a general reduction in fees was in 2009, because of the global recession. This made it “encouraging” that firms “seem resilient to the many economic challenges of recent years”.
Participants reported fee income per equity partner of nearly £1.2m, an increase of 7.4% but a little lower than the previous year.
“Following a fall last year, residential conveyancing work was the strongest performer this year, with a median increase of 27.4%.
“All other work types returned positive results, with private client work, such as probate and trust administration work, seeing the next highest increase at 14%; this is broadly in line with last year, demonstrating that this is one of the more consistent income streams.
“Litigation work performed well again, improving slightly over last year’s results.”
Salary costs as a percentage of fee income dropped by half a percentage point to 63.9%, even though the ratio of fee-earners to equity partners fell for the first time in many years from 6.7:1 to 6.3:1.
“We are not aware of a particular tightening in the recruitment market and so we may be observing an adjustment in firms’ approach to recruitment and a greater focus on getting the most from existing staff,” the survey said.
“It is also possible that the gradual expansion of AI across law firms has contributed towards the reduction in fee-earner gearing.
“Our experience is that many smaller firms are watching and waiting to ride the ‘AI wave’, happy to let larger firms invest often significant amounts in the rapidly changing technology.”
The number of fee-earners increased by 2.3% and the hourly cost of one (based on 1,100 chargeable hours per year) was £131.39, compared to hourly fees per fee-earner of £147.33. Therefore, 89% of fees earned were used to cover costs.
However, the average number of chargeable hours recorded per fee-earner was 807, albeit up from 756 in 2024, but still “well below the generally accepted target of at least 1,000 to 1,100 chargeable hours”.
The survey said: “It is clear from our findings… that the ability for fee-earners to convert their time into chargeable hours should still be a point of focus for everybody.
“Whilst it is encouraging that we have now seen a rise in chargeable hours per fee-earner for the second year in a row, there is still a clear gap between reality and expectation and firms should avoid ‘gearing up’ for the sake of it.”
Spend on non-salary overheads fell as a share of income from 31% to 28.4%, as did lock-up days (work in progress and debtors combined) from 146 days to 134 excluding unbilled disbursements.
Almost all of the 21% increase in profits per equity partner (PEP) in last year’s survey came from client account interest and that report said they needed to “wean themselves off” it.
This year, PEP increased overall by 13% but excluding interest it was still 10.5%. Net profit per equity partner (before deducting notional salaries for partners) was £290,183.
With the Solicitors Regulation Authority planning to look more closely at firms’ financial stability, the survey found that 13% of participants had taken drawings in excess of profits, compared to 19% in 2024 and 23% in 2023.
Borrowings did not exceed current assets for any participants but exceeded partner capital in 12% of firms. Partner capital increased in 45% of firms.
Section chair Abby Winkworth said the survey showed that, “beneath the distraction and the noise” in the market on a range of big issues, like AI and private equity investment, “the fundamentals still matter most”.
She explained: “Firms that perform well do so because they have maintained discipline in the core operational drivers of a sustainable legal business: productivity, pricing, cost control, cash management, client service, people management and leadership capability.
“The data demonstrates that revenues have continued to grow and that profitability has improved as a direct result of good overhead management.
“At the same time, it exposes how fragile those gains can be. Fee-earner productivity (by recorded chargeable hours) remains below potential. Lock-up improvements would have a significant positive impact on resilience. Profits continue to be supported by factors outside firms’ direct control.”
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