Monday, February 04, 2013

Times are tough for lawyers too as profits nosedive at Scottish law firms

TRADING CONDITIONS Trading conditions remain tough for solicitors' firms, despite an increase shown in profits for sole practitioners and larger firms, according to a survey commissioned by the Law Society of Scotland. The Law Society's Cost of Time survey for 2012, based on the results of 244 participating firms, showed an overall drop in profits per partner levels which are now on a par with those of 2010, with cash flow issues proving to be a particular problem for solicitors.

Median profits for equity partners in Scotland have dropped to £64,000, the same level as two years ago, following an increase in 2011. Partners in medium sized firms have seen the biggest drop, with 2-4 partner firms dropping from £75,000 to £67,000 in 2012 and 5-9 partner firms seeing a £4,000 fall to £76,000 in 2012. However the survey showed an increase of £7,000 to £53,000 on average for sole practitioners and those in 10+ partner firms have seen a rise in their per partner profits from £144,000 to £163,000.

The results illustrate the extent of the difference between the profitability of larger firms with 10 or more equity sharing partners and smaller firms, with larger firms' average profit per equity partner exceeding those at smaller firms by £79,000.

Equity partners in a law firm are not paid a salary, and the profits they earn are often used to fund working capital, so the figures have to be interpreted with care. The apparent paper profit is not the same as actual earnings.

The research has also shown a drop in law firms' bank balances in the past year from over £200,000 last year to just over £50,000 this year for 10+ partner firms. 2-4 partner firms have seen their median bank balance fall from £27,000 to £6,000, and 5-9 partner firms have also seen a major fall.

Management consultant Andrew Otterburn, co-author of the Cost of Time report with actuary Dr John Pollock, said that solicitors can take steps to improve their firm's bank balance.He said: "There has to be a real focus on cash flow and maintaining a healthy bank balance. Understandably the priority for most solicitors is attending to the needs of their clients, but they also need to ensure that their own business is operating effectively. There are some practical measures that solicitors can take to ensure that cash flow doesn't become a major issue and they can continue to run an efficient business and improve cash collection in what is still a difficult economic climate."

Lorna Jack, chief executive of the Law Society of Scotland, said: "The cost of time survey is a good indicator of the general health of the profession on an annual basis and it's clear that the effects of the recession are not over.We're all well aware of tightening budgets right across the private and public sectors and we are encouraging our members to think very seriously about how they shape their business and look hard at their strengths and weaknesses to make the most of available opportunities.The legal services sector is, and will remain, highly competitive. We anticipate the arrival of the first licensed legal services providers in Scotland in the first half of this year and we will undoubtedly see further consolidation. As the legal market continues to change it's vital that our members make sure that they are running a tight ship and take steps to ensure that they are effective business managers as well as excellent solicitors.Our professional practice team at the Society, headed by Coral Riddell, are more than happy to provide information and advice to solicitors who want to discuss best business practice."

Further in-depth reports from the Cost of Time survey's authors, Dr John Pollack and Andrew Otterburn, will be published in the February and March editions of the Journal.

The Cost of Time Survey is carried out annually by Dr John Pollock from Pollock & Galbraith Consulting Actuaries and the full report prepared jointly by him and Andrew Otterburn, a management consultant who published 'From Recession to Upturn - financial management and strategy for law firms' in 2010, available here :  'From Recession to Upturn - financial management and strategy for law firms

Based on the results of 244 firms, this survey is the largest undertaken by any of the UK Law Societies and is believed to be the largest representative study of law firms in Europe. Further results will be published in the Law Society of Scotland Journal magazine in the February and March editions.

Currently 3,634 solicitors work as either partners or employed solicitors at the 30 biggest firms in Scotland, while a further 4,280 solicitors, including partners, work in 566 high street firms around the country, most of which are 2-5 partner firms (501). There are 628 sole practitioners. 2,057 solicitors work in-house and do not contribute to the Cost of Time survey.

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