financial benchmarking 2019: report

Financial Benchmarking

2019: Report

www.lawscot.org.uk/financialbenchmarking

2

Contents Contents ................................................................................................................................................................... 2

1. Forewords ............................................................................................................................................................ 3

2. Executive Summary ............................................................................................................................................. 5

Introduction ......................................................................................................................................................... 5

Overall Totals ....................................................................................................................................................... 5

Key Findings ......................................................................................................................................................... 5

Profitability .......................................................................................................................................................... 6

Aberdeen, Dundee & Perth ................................................................................................................................. 6

Glasgow ............................................................................................................................................................... 6

Edinburgh ............................................................................................................................................................. 6

Country ................................................................................................................................................................ 6

3. Year on Year Metrics ............................................................................................................................................ 7

4. Income ............................................................................................................................................................... 11

5. Expenditure ........................................................................................................................................................ 15

6. Profit .................................................................................................................................................................. 20

7. Accounts ............................................................................................................................................................ 22

8. Staff .................................................................................................................................................................... 28

9. Work Types ........................................................................................................................................................ 32

10. Definitions & Terminology ............................................................................................................................... 41


3

1. Forewords

President’s Foreword

Having an overview of the financial health of law firms in Scotland offered by our Financial Benchmarking Report

provides insight into how some of our members’ businesses are operating in an increasingly competitive

marketplace.

The legal sector has gone through significant changes in recent years and we know that while some firms have

reported an upturn, conditions have remained challenging for others. The 2019 report has shown a drop in the

total income per partner figure, although profitability per partner remains in line with the previous year and is

substantially higher than the 2016 Financial Benchmarking Survey. This indicates that firms are taking effective

measures to address challenges and manage their costs.

The report is designed to help Scottish solicitors assess their firm’s performance year on year and how they

compare against competitors and the legal market in Scotland more widely. It can also provide useful insight for

the Society into the kinds of services and support solicitors may need to help boost their business performance.

I would like to thank our members who participated this year. Firms which contributed to this year’s survey will

benefit from the detailed information contained in their individual interactive, online report.

I hope you find the report interesting, informative and a useful part of your management toolkit as you plan for

the future.

John Mulholland

President

Law Society of Scotland


4

"Clydesdale Bank is delighted to once again be associated with the Society's Financial

Benchmarking Survey. The insights gained by our Professional Services Team from the

Scottish legal profession are reflected in the results of this year’s survey. With income per

partner lower than the previous year across all regions, this suggests costs continue to be

well controlled, as median Profit per Partner remained in line with previous year. However

the day-to-day challenges of generating new and profitable fee income, managing working

capital and succession planning remain priorities.

The Financial Benchmarking Survey findings will help firms gain a greater understanding of

the legal market and assess where they sit in comparison to their peers. The data in the

overall report is useful in helping solicitors develop their strategic thinking and future

planning, allowing them to assess what is working well and what may need to change within their business to

boost performance.

Our team of trained specialists have a proven track record of helping to deliver strong and sustainable financial

performance coupled with a deep knowledge of the dynamics driving this industry. We work closely with

solicitors to create bespoke funding solutions and add value through our relationship-based approach."

Sue Carter MBA. UK Head of Professional Services Sector, Clydesdale Bank. [email protected]


5

2. Executive Summary

Introduction

The 2019 Law Society of Scotland Financial Benchmarking Survey findings provide an indication of the health of Scotland’s legal sector. The survey, which took place between February and April this year, retained the streamlined format of the 2018 online questionnaire, and was once again administered by technology systems and services provider Tribal.

In addition to the full report, participating firms can access their own interactive report. We are confident that the firms which took part will find the confidential, online reporting helpful in ensuring that their business is sustainable and efficient while continuing to offer clients a great service.

Participants are able to analyse trends for their firm, competitors and of the profession generally. Within this executive summary, reference has been made to the previous year’s Financial Benchmarking Survey and, where appropriate, the previous Cost of Time survey results to identify year on year trends.

The interactive report includes the ability to view and compare:

• income and costs by the size or location of a firm

• a breakdown of the firm’s total costs • cashflow management • the relationships between the different results, for example, plotting staff costs against profitability.

Firms were invited to participate in the survey via online or paper questionnaire. 58 firms completed the questionnaire, representing 5% of firms in Scotland. This was a lower participation rate than for 2018. Nevertheless, the sample size allows for conclusions to be drawn for many metrics, and we saw consistent trends emerging for some metrics since the survey was relaunched in 2017. The sample is self-selecting which may introduce bias into the results that is not directly quantifiable. Highest participation rates were seen in sole practitioners and 2-4 partner firms; there was relative under-participation from 5-9 and 10+ partner firms.

Overall Totals

• Total fee income – £51 million. £26 million was recorded for court work and £1.6 million was legal aid (civil and criminal).

Key Findings

Of the participating firms, total firm income per partner was slightly lower in this year’s survey than in the 2018 survey for firms in all regions. This effect was particularly pronounced for Glasgow firms and for Edinburgh firms. Median total income per partner decreased from £270,500 to £234,562 for Glasgow firms, and from £319,231 to £229,976 for Edinburgh firms. For firms in Aberdeen, Dundee and Perth, and the Country region, the drop was minimal.

Median profit per partner increased for firms in Aberdeen Dundee and Perth, and firms in Glasgow (from £107,103 to £148,000 for Glasgow firms). Median profit per partner decreased slightly between the two years for Edinburgh firms and for Country firms.

Salaries as a percentage of income increased between 2017 and 2018 for firms in all regions except Glasgow.

Income per fee earner FTE remained relatively consistent across the regions; as in previous years it appears challenging to push this figure above £200,000, although firms in Glasgow (median result of £216,028) and firms in Edinburgh (median result of £215,709) have done so.


6

Legal aid income per partner continued to fall. This trend suggests that firms continue to find it increasingly difficult, from a financial perspective, to justify undertaking legal aid work.

Profitability

• Overall profitability at a median of £76,000 per partner was in line with the 2018 result, and £7,000 higher than the result from 2017 Within this, profitability was highest for Glasgow firms; this was consistent with the 2018 result.

• Once again, the profitability of firms in Scotland is lower than the rest of the UK. The RBS 2019 Financial Benchmarking survey indicates median profit per equity partner of £128,000.

• Profit is before any allowance for equity partners drawings, and before tax.

Aberdeen, Dundee & Perth

• Median profit per partner for firms in Aberdeen, Dundee and Perth was £91,175, an increase on the 2017 result of £74,082 and the 2018 result of £76,143. The median profit margin for firms in Aberdeen, Dundee and Perth was 43.9%; this figure has risen consistently since 2017, when the result was 37.7%. During the period 2017-2019, total income per partner fell from £178,721 to £165,574. So firms in Aberdeen, Dundee and Perth appear to be managing costs in such a way as to increase profits in the face of falling total income per partner.

Glasgow

• Median profit per partner for Glasgow firms was £148,000, representing a significant 38% increase on 2018’s result of £107,103. Interestingly, median total income per partner fell from £270,500 in 2018 to £234,262 in 2019. Salaries as a percentage of total income fell between 2018 and 2019, from 33.4% to 22.4%. It appears Glasgow firms are managing pay costs effectively in order to increase profit levels.

• Capital per partner at £114,818 continued an upward trend since the 2017 result of £60,583.

Edinburgh

• Median profit per partner was £81,963, a small decrease of 6% on 2018's result. • Total income per partner fell more dramatically between 2018 and 2019, from £319,231 to £229,976. • Salaries as a percentage of total income rose from 32.0% in 2018 to 35.9% in 2019. Despite this increase,

salaries were reasonably well controlled, which meant the drop in total income per partner did not lead to a commensurate drop in profit per partner.

Country

• Between 2017 and 2019, the median profit per partner for Country firms remained very consistent, between £65,000 and £70,000 per partner. The 2019 result was £65,974.

• Total income per partner also remained consistent between 2018 and 2019; the 2019 median was £239,598.

• Between 2017 and 2019, median capital per partner fell from £67,183 to £49,515. • Salaries as a percentage of total income also remained consistent between 2017 and 2019 at around 34%. • Overall, results for Country firms were the most consistent of all the regions in the period 2017-2019.


7

3. Year on Year Metrics

There are several notable results when comparing the 2019 survey against the 2018 survey.

Of the participating firms, total firm income per partner was slightly lower in this year’s survey than in the 2018 survey for firms in all regions. This effect was particularly pronounced for Glasgow firms and for Edinburgh firms. Median total income per partner decreased from £270,500 to £234,562 for Glasgow firms, and from £319,231 to £229,976 for Edinburgh firms. For firms in Aberdeen, Dundee and Perth, and the Country region, the drop was minimal.

Median profit per partner increased for firms in Aberdeen Dundee and Perth, and firms in Glasgow (from £107,103 to £148,000 for Glasgow firms). Median profit per partner decreased slightly between the two years for Edinburgh firms and for Country firms.

Salaries as a percentage of income increased between 2017 and 2018 for firms in all regions except Glasgow.

Income per fee earner FTE remained relatively consistent across the regions; as in previous years it appears challenging to push this figure above £200,000, although firms in Glasgow (median result of £216,028) and firms in Edinburgh (median result of £215,709) have done so.

Legal aid income per partner continued to fall. This trend suggests that firms continue to find it increasingly difficult, from a financial perspective, to justify undertaking legal aid work.


8

Total Income per Partner

Median total income per partner increased between 2016 and 2017 for all regions except Aberdeen,

Dundee and Perth. Between 2017 and 2018, median total income per partner decreased for all

regions; Edinburgh showed a particularly pronounced decrease from £319,231 to £229,976. It is worth

noting that differences in participating firms between the three years may have contributed to the

results.

Salaries as a % of Total Income

Median salaries as a percentage of total income were fairly constant between 2016 and 2017

in all regions except Aberdeen, Dundee and Perth, where the figure decreased from 29.6% to

23.4%. In 2018 the figure rose again for firms in Aberdeen, Dundee and Perth to a median result

of 42.6%. Glasgow firms showed a reduction from 33.4% in 2017 to 22.4% in 2018. It is worth

noting that differences in participating firms between the three years may have contributed to

the results.


9

Profit Margin %

Across the regions, the percentage profit margin remained broadly constant with the exception of

Glasgow firms, for whom the median profit margin fell from 46.1% in 2016 to 38.0% in 2018.

Profit per Partner

Median profit per partner for Glasgow and Edinburgh firms increased consistently between 2016 and

2018; for the other regions, the result remained broadly static across the three years.


10

Capital per Partner

There was a notable decrease in median capital per partner for Edinburgh firms between 2016 and

2017, from £279,679 to £162,000; but this result rose again for 2018, to £270,967. It is worth noting

that differences in participating firms between the three years may have contributed to the result.


11

4. Income

This section of the report analyses firms’ income. Income is a key driver of firms’ financial

health and in this section we analyse income in several different ways (per partner, per fee

earner etc) to examine what factors influence firms’ income levels.

The sample is self-selecting which may introduce bias into the results that is not directly quantifiable.

Highest participation rates were seen in sole practitioners and 2-4 partner firms; there was relative

under-participation from 5-9 and 10+ partner firms.

Total Income per Partner

Unlike previous years, median income per partner was highest in the country region, at £239,598.

Upper quartile income, however, was highest in Glasgow, followed by Edinburgh.


12

Total Income per Fee Earner FTE

Median income per fee earner ranged from £143,798 in country firms to £216,028 in Glasgow firms.

Total Income per Staff FTE

Total income per staff FTE varied across the regions, ranging from a median of £55,731 for country

firms, to a median of £125,253 for Glasgow.


13

Non-fee Income as a % of Total Income

Variances in this result across regions were small, as it represented less than 2% of total

income.

Reporting Year Partner Target per Partner

Reporting year fee income targets per partner varied across the regions, ranging from £100,000 for

firms in Aberdeen, Dundee and Perth to £165,000 for firms in Country.


14

Following Year Partner Target per Partner

Following year fee income targets per partner varied across the regions, ranging from

£100,000 for firms in Aberdeen, Dundee and Perth to £174,332 for firms in Edinburgh.


15

5. Expenditure

This section analyses expenditure in detail. Results are shown for salaries, overheads, and

expenditure by type e.g. office premises, IT & website, marketing & sponsorship.




Salaries as a % of Total Income

The median results for salaries as a percentage of income by region were consistent with the previous

year's result for Edinburgh and country firms. The median result for Glasgow fell versus the previous

year; that trend was reversed for firms in Aberdeen, Dundee & Perth.

Overheads as a % of Total Income

Overheads as a percentage of total income ranged from a lowest median of 26.8% to a highest

median of 30.4%.


16

Office Premises as a % of Total Expenditure

Office premises costs as a percentage of total expenditure appeared higher in Edinburgh and in

Glasgow.

Office Premises Excluding Mortgage and Rent

Median office premises costs excluding mortgage and rent as a percentage of expenditure were

highest for Country firms at 4.9%.


17

Office Premises Rental

Median rental office premises costs as a percentage of expenditure were highest for Glasgow firms at

8.7%.

Staff Salaries as a % of Total Expenditure

With the exception of Edinburgh, the results were broadly consistent across the regions.


18

Professional Indemnity Insurance Premium Costs as a % of Total Expenditure

The variance between the results across the regions was minimal.

Other Costs as a % of Total Expenditure

With the exception of Edinburgh firms, the variance between the results across the regions was

relatively small.


19

IT & Website as a % of Total Expenditure

The variance between the median results across the regions was relatively minimal.


20

6. Profit

Profitability is a key indicator of financial health. It is generally accepted that larger law firms,

benefit from economies of scale and are better able to cope with the uncertainties of a volatile

marketplace.

• Overall profitability for 2018, at a median of £76,000 per partner, was in line with the

2017 result, and £7,000 higher than the result from 2016. Within this, profitability was

highest for Glasgow firms; this was consistent with the 2017 result.

• Once again, the profitability of firms in Scotland is lower than the rest of the UK. The

RBS 2019 Financial Benchmarking survey indicates median profit per equity partner of

£128,000.

• Profit is before any allowance for equity partners drawings, and before tax.




Profit Margin %

The median profit margin ranged from 34.1% to 43.9% when firms were grouped by region.


21

Year End Drawings - Equity Partners per Partner

As expected, year end drawings per equity partner increased in line with firm size, to a

maximum median result of £101,809 in 5-9 partner firms.

Country firms achieved the highest result with a median of £85,000, closely followed by

Edinburgh firms with a median result of £77,384.


22

7. Accounts

This section of the report examines accounting metrics which influence firms’ financial health,

such as debt, work in progress and bank balances.




Amount of WIP as a % of Total Fee Income

The median result for WIP as a % of total fee income was highest in Aberdeen, Dundee &

Perth;


23

Amount of WIP Recovered as % of Total Fee Income

Levels of write-off were lowest in 10-49+ staff firms, although the median result for these firms of 99.7%

was broadly in line with 2-4 staff firms and 5-9 staff firms. It suggests that very small firms may not have

the resources for adequate credit control.


24

Bank Balance

As in the 2017 survey results, bank balances were lowest in Aberdeen, Dundee and Perth, perhaps a

reflection of the recent economic difficulties in Aberdeen.

Capital per Partner

When firms were grouped by region, Edinburgh showed the highest median result for capital

per partner. This mirrors the previous year's results.


25

Average Debtor Days

Aberdeen, Dundee & Perth firms seemed the most exposed to risk with a median average

debtor days result of 49.

Invoiced Fees Written Off per Partner

Median levels of write-off per partner were highest in larger firms.


26

Country firms performed best, with median average write-off per partner of £1,983.

There was little variance in the median results when firms were grouped by staff numbers.


27

One Year Creditors per Partner

Edinburgh firms owed more money, with a median result for Edinburgh firms of around

£48,853.

Over One Year Creditors per Partner

There was no notable correlation between region and creditors over one year.


28

8. Staff

This section includes key staffing metrics such as staff gearing ratios and average salaries.

Fee Earner Gearing

The results showed no strong correlation between fee earner gearing and region.

Non-Fee Earner Gearing

When firms are grouped by region, the results show that firms with the highest non-fee earner gearing

ratio are in Glasgow and in the country region.


29

Paralegals Gearing

The results show no strong correlation between paralegals gearing and region.

Average Salaries

This chart shows average salary results across all staff types. A lower proportion of

respondents completed the staff section of the survey questionnaire, so we are unable to

subdivide the firms, and results are shown for all firms.

For most staff types, the lower and upper quartiles are relatively close to the median result,

indicating that the range of salary levels is not particularly wide. However, for associates, the

upper quartile result is notably higher than the median result, indicating that there is a greater

variation in salaries for these staff. A similar but less pronounced effect is true for solicitors.


30

Fee Earner Salaries as a % of Total Income

Median fee earners' salaries represented a greater proportion of total income in Edinburgh

firms.

Associates Salaries as a % of Total Income

Associates' salaries were equivalent to 13.0% of total income for firms in Edinburgh; the highest result.


31

Solicitors Salaries as a % of Total Income

Solicitors' salaries were equivalent to 11.7% of total income for firms in Edinburgh; by far the

highest result.

Non-Fee Earner Salaries as a % of Total Income

Non-fee earner salaries as a percentage of total income were highest in Aberdeen, Dundee &

Perth, with a median result of 25.7%.


32

9. Work Types

Property / Conveyancing Income per Partner

Based on the sample of respondent firms, property/conveyancing income per partner was

highest in 2-4 partner firms, with a median result of £154,377.

Property/conveyancing income per partner was highest in country firms; a different result to

last year.


33

Based on the sample of respondent firms, property/conveyancing income per partner was

highest in 2-4 staff firms, with a median result of £170,066.

Commercial Income per Partner

Based on the sample of respondent firms, commercial income per partner was highest in 5-9

partner firms, with a median result of £69,586.


34

Based on the sample of respondent firms, commercial income per partner was highest in firms

with 1 staff member; an unusual result.

Corporate Income per Partner

Based on the sample of respondent firms, corporate income per partner was highest in 5-9

partner firms, with a median result of £157,856. We would nevertheless expect this figure to

be higher in 10+ partner firms if any firms of that size had answered the question.


35

Based on the sample of respondent firms, corporate income per partner was highest in firms

with 1 staff member; an unusual result.

Financial Services Income per Partner

All firms who answered this question were in the country region.


36

Trust and Executry Income per Partner

Median trust and executry income was highest in 5-9 partner firms at a median result of

£97,601.

Median trust and executry income was highest in Aberdeen, Dundee & Perth firms, at a

median result of £97,459.


37

Tax Advice Income per Partner

Based on the sample of respondent firms, median tax advice income per partner was highest

in 2-4 partner firms. The upper quartile result is likely to reflect unusually high levels of tax

advice income in a small number of firms.


38

General Income per Partner

General income per partner was highest in country firms, with a median result of £19,979.

Criminal Income per Partner

Based on the sample of respondent firms, median criminal income per partner was

highest in 2-4 partner firms at £35,843.


39

Civil Income per Partner

Civil income per partner was highest in Edinburgh firms, with a median result of

£98,029.

Legal Aid Income per Partner

Based on the sample of respondent firms, very large 50+ staff firms did not undertake any

legal aid work. Median income per partner for other firm sizes ranged from £6,294 to

£40,335.


40

Legal Aid Income as a % of Total Income

Legal aid income as a percentage of total income was highest in firms with 1 staff member;

the median result was 59.1%.


41

10. Definitions & Terminology

Income

Income

Total gross income

Fee income

All fee income including legal aid income and court fees

Non-Fee Income

This could include interest on savings and investments, client accounts or other bank accounts

or rents received

Expenditure

Office premises

Office premises costs Including rent, mortgage payments, rates, utilities, buildings / contents

insurance etc, maintenance and cleaning

Staff salaries

Not including partners’ drawings but including the salaries for salaried or fixed share partners.

Including employers’ NIC and employers’ contributions for staff pensions. For limited

companies, excluding director salaries

Staff training & library resources

Including costs of external and internal training events, books for library and subscriptions to

online learning resources such as Lexis Nexis or PLC

Other staff costs

Including practising certificate fees

IT & website

Including software licensing, development, hardware purchase and maintenance costs etc. Not

including salaries for in-house IT staff - these are included under staff salaries

Marketing & sponsorship

Marketing and sponsorship cost not including salaries for marketing staff which are included

under staff salaries

Client entertaining, client training & business development

Costs associated with client entertaining, client training & business development

P.I. premium costs

Professional indemnity insurance costs


42

Other

Including any expenditure that isn't covered by another category e.g. postage, printing

Profit

Profit Margin

Profit margin (income minus costs) expressed as a percentage of income i.e. (total gross

income minus expenditure) divided by total gross income

Profit per partner

Profit divided by the total number of partners in the firm

It should be noted that “profit” is before any allowance for a salary (for profit-sharing partners)

and is before tax

Accounts

Amount owed by clients

Work billed, commission owed and outlays outstanding at the end of the Financial Year

Age of debt

The number of days a bill has been unpaid since it was issued

Work in progress

A measure of how long it takes from the recording of an hour to the billing of that hour

Staff

Staff Numbers

Total FTE (full time equivalent) of all staff within a firm

Fee Earners

Partners

Equity partners and salaried or fixed share partners/members. Members includes members of

an LLP, multi-national practice or licensed provider and shareholders and directors of a

company, as relevant to your structure

Associates

Associates and any Senior Associates

Solicitors

Senior Solicitors, Assistant Solicitors and Solicitors

Paralegals and other fee earners

Paralegals, legal executives, and any other staff who are fee earners but not solicitors, and not

included in any other fee earner sub-categories

Non-fee earners


43

Secretarial staff

Reception/administration staff

HR staff

Marketing staff

Finance staff

I.T. staff

Other non-fee earning staff

Any staff who are not fee earners and are not included in the above sub-categories

Fee Earner Gearing

The number of fee earners in proportion to each partner

Non-Fee Earner Gearing

The number of non-fee earners (support staff) in proportion to each partner

Paralegals Gearing

The number of paralegals in proportion to each partner

Work Types

Commercial Includes:

Partnerships

Licensing

Insolvency Work

Leasing (non-heritable property)

Environmental law

Intellectual Property

Planning

Employment Advice

Banking

Shipping / Maritime Law

Energy Law

Franchising

Commercial Contracts

Regulatory Matters

Corporate Includes:

Company / Business Acquisition / Sales

Employment Matters


44

Insolvency

EEC and Competition Law

Banking

Employee Benefits

Management Buy-outs

Share Purchase / Reorganisation

Company Formation

Company Secretarial

Public Issues

Criminal (including criminal legal aid)

Includes: Criminal Injuries Compensation Board and all other criminal, non-legal aid court work.

Civil (including civil legal aid)

Includes all civil court work such as:

Arbitration

Commercial

Construction

Personal Injury

Matrimonial

Employment Tribunal

Children's Panel

Debt Recovery / Defence/Diligence

Alternative Dispute Resolution

Licensing

Reparation

Re-possession

Planning (Enquiry)

Interdict

Family / Child Law Matters

Lands Tribunal

Children’s legal aid

Financial services Includes:

Investment Advice

Pension Advice

Pension Scheme Administration

Pension / Employee Benefits

Mortgage Advice

Tax Advice

Insurance Advice (not general insurances)

Bonds

Split Capital Investments

Zero Dividend Investments


45

General Includes:

Guardianship

Charity Administration / Law

Adoption

Immigration / Naturalisation

Preparation of Accounts

Social Security Matters

Mental Health Matters

Miscellaneous advice and matters not otherwise shown e.g. Powers of Attorney

Insurance Includes:

General insurance work i.e. Arranging or providing advice on arranging general insurance

contracts, not concerned with Financial Services legislation

Property/conveyancing

Domestic (including domestic securities)

Commercial including Farms and Estates, Fishing, Minerals & Security Work (not domestic)

Hotels and Licensed Premises

Property Letting / Factoring

Leasing (heritable property)

Planning

Time Share Schemes

Crofting Matters

Succession to Tenancies

Estate Agency

Tax advice Includes:

Tax Compliance

Tax Planning

Tax Advice

Trust and executry Includes:

Will Drafting

Trust Administration

Trust Variation

Executry Administration

Tax Planning

Off-Shore Trusts

Acronyms

FTE

Full time equivalent. For example, a member of staff working for 20 hours of a standard 40hour

week will be 0.5 full time equivalent (FTE).

WIP

Work in progress

financial benchmarking 2019: report

Documents