THE 16th Annual Law Firm Survey produced by PricewaterhouseCoopers reports a “fantastic year� for leading law firms, but a mixed performance for North West firms.
David Thurkettle, regional head of the professional partnership advisory group at PricewaterhouseCoopers said: “The survey indicates that the Top 10 national firms are beginning to break away from the rest in terms of profitability achieving average profits per partner of £866,000 compared to £497,000 for the remainder of the Top 25; the average for firms in the North was £333,000. A key driver in the level of profits per partner in these firms has been the restriction on equity partner numbers. In contrast to the larger firms, 60% of firms in the North West continued to increase equity partner numbers in 2007 and only 20% decreased their numbers.�
Profit margins for many firms in the Top 25 remained steady, and in the North West they remain under pressure. At one extreme, 20% of firms in the region achieved net profit margins above 36%, but worryingly at the other extreme, a larger number (60%) of firms achieved margins of less than 20%. None of the Top 25 firms achieved a margin less than 20% and the majority of North West firms are therefore lagging well behind the larger national firms.
Staff costs continues to be the key challenge for firms, in particular in the North West where firms are suffering from a soaring cost of salaries for young lawyers similar to that experienced in London. No firms in the North West managed to maintain staff costs below the threshold of 40% of fees billed, whereas 44% of the Top 10 and 42 % of the Top 11-25 firms achieved this benchmark.
David Thurkettle said: “This result is somewhat surprising as we would expect firms in the North West to benefit from a lower cost regional staff base than the larger national firms. This is clearly an area of focus for the regional firms if margins are to be increased.�
The PricewaterhouseCoopers survey highlights that the top law firms are suffering extremely high staff turnover and the war for talent is intensifying. Half the top ten firms reported staff turnover at more than 31 per cent among their three to five years’ post qualified lawyers, and 25 per cent turnover was broadly speaking the norm among leading firms.
“Losing a quarter of your people annually when you are a professional services firm is worrying, especially when you consider that this is costing those firms approximately £300,000 for each qualified person in terms of real and opportunity costs and the disruption in continuity to the client.�
The PricewaterhouseCoopers report confirms what many commentators have suspected for some time: that there is a direct correlation between those firms recording the highest chargeable hours and those with the highest staff turnover.
Similarly, whilst the Northern firms do not achieve the high utilisation statistics reported by their competitors, by the same token they do not suffer from the high levels of staff turnover experienced by the larger firms. In contrast to the 25 per cent average for the Top 25 firms, the “norm� in the North is less than 10 per cent, a level achieved by an impressive 80 per cent of firms for staff with between 1 and 5 years post qualified experience.
David Thurkettle comments:
“Loyalty is a depreciating asset in many top law firms today, but the survey results show that Northern law firms are clearly getting something right. In addition to a motivated and committed staff, low staff turnover has obvious benefits to bottom line profits. However, firms must ensure they achieve the appropriate balance between securing loyalty and obtaining productivity from their staff in order to achieve continued growth in top line performance. This will be a particular challenge for firms in the North West given the current salary pressures and high levels of staff costs.�
This year’s survey also addresses for the first time the issue of corporate responsibility (CR). Rather disappointingly, only 44% of firms in the North have a formal CR programme, compared to 86% of the Top 25 firms. The most common features of CR programmes appear to be environmental issues, community/charity involvement and employee welfare. Firms also reported significant client pressure with regard to CR, although the survey indicates there is still some way to go to increase partner engagement and to fully embed CR practices into law firm management.
Copies of the survey can be ordered online at http://www.pwc.com/uk/lfs.