North West legal market ‘bouncing back strongly’

• Fee income and profit per equity partner rising, finds survey
• M&A activity continues to thrive while ‘lock-up’ days are reducing
• Annual review of legal sector conducted by Moore and Smalley and MHA

North West law firms are benefiting from improved economic conditions and legal mergers continue to rise, according to a study of the region’s legal market.

The latest report from MHA, the UK-wide group of accountancy and business advisory firms, indicates a more positive outlook across most firm sizes, helping to ease the considerable financial pressures experienced in recent years.

The annual review of legal firms, conducted in partnership with North West-based accountancy firm Moore and Smalley, one of nine MHA members, highlights growing demand for legal services in the commercial and residential property sectors, with confidence also returning to many practices active in corporate transactions.

Report highlights include:
• Significant growth in total fee income generated by practices with more than 11 partners
• Extraordinary growth in profit per equity partner in 25+ partner practices as a result of mergers
• ‘Lock-up days’, the time it takes to get paid for billable work, have reduced for all sizes of practice, other than sole practitioners
• Expenditure on staffing remained consistent, but is expected to increase this year
• Practice costs of rent, marketing, IT and professional indemnity insurance all saw an average reduction as a percentage of income, with the largest firms enjoying the most considerable percentage decrease in these overheads.

Karen Hain, professional practices partner at Moore and Smalley, and head of the professional practices group at MHA, said: “Large practices have succeeded in making true economy of scale savings in overheads and running expenses, while still increasing top line fee income. We have also seen a reduction in equity partner numbers, so that these fewer individuals are really benefitting from higher rewards derived from personal capital invested in the business.

“We are seeing far more movement this year in smaller practice mergers, most of which is driven by succession planning issues.”

As the results from last year predicted, personal injury work in progress, signed up before the Legal Aid, Sentencing and Punishment of Offenders Act 2012 (LASPO), is dwindling, meaning a reduction in income as a result of diminished success fees. Many firms have looked for new areas of litigation to replace the falling workload. Legally aided funded practitioners are experiencing further cuts to income levels and are under continued fee pressure.

Overall the results are positive in relation to income, showing increases in total fees across all sizes of firms. There is significant percentage growth in fee income per equity partner, especially in the 25+ partner practices, where merger activity has generated growth, with strategic plans keeping the equity ownership group smaller.

Improvements in profit have been made, but not at the same growth rates as fee income rises. However, results show expenditure on certain key overheads has reduced as a percentage of fee income. Expenditure on staffing remained fairly consistent, although this is expected to increase this current year and into next as market forces take over and staff look for new opportunities at higher pay rates.

The survey shows that firms have taken the prompt to put the management of lock up – unbilled work in progress and unpaid fees – higher up their agenda and have made some significant improvements over the last 12 months as a result. Pressure from the banks will have been applied to reduce levels of funding, and so planning more control over working capital has been of benefit. There was a 15% reduction in lock up achieved by the 11 to 25 partner firms.

Commenting on the report, Karen Hain concludes: “2014 was in many aspects a positive financial year for law firms and for individual partner profitability. There will be pressure on small firms to maintain income and profitability, but more crucially to improve their levels of lock up. In 2015 and 2016 we are likely to see more consolidation in the sector, with further merger activity expected.”

To read a copy of the report please click here.