Partner Article

Law firms’ merger activity is thriving

The latest annual Professional Practices Benchmarking Report 2015 from West Sussex and Gatwick-based chartered accountants Carpenter Box, in conjunction with MHA, the UK-wide group of accountancy and business advisory firms, points to encouraging signs of growth as firms feel the benefit of the improving economy, most notably through an upturn in commercial and residential property work.

The review indicates a much more positive outlook across most practice sizes in the South, helping to ease the considerable financial pressures experienced in recent years.

This year’s results show how wider economic growth is driving up demand for legal services in the commercial and residential property sectors, with confidence also returning to many practices active in corporate transactions.

The report highlights:

• Wage costs are still reducing as a percentage of fee income and turnover.

• Practice costs of rent, marketing, IT and professional indemnity insurance all saw an average reduction as a percentage of income.

• There has been significant growth in the average turnover for firms with 11-24 partners and 25+ partners.

• Lock up days have improved for all sizes of practice.

• Total fee income has increased for all sizes of practice, although this has not necessarily been reflected in profitability figures.

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. Legal-aid funded practitioners are experiencing further cuts to income levels and are under continued fee pressure.

In line with other regions across the UK, overall the results for the south are positive in relation to income, showing increases in total fees across all sized 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.

Charlie Eve, Head of the Professional Practices Group at Carpenter Box, said: “The larger 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.”

Profitability has not tracked the rise in fee income levels this year. However, results show expenditure on certain key overheads has reduced as a percentage of fee income. Expenditure on staffing remained fairly consistent.

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. As Charlie Eve explains: “The overall improvement in firms’ lock up is very encouraging and shows that faster work-in-progress billing and a greater urgency when collecting debts is starting to have an impact. More work needs to be done though, and a suggestion would be to target a 10 day lock up reduction for the coming year.”

This was posted in Bdaily's Members' News section by Colin Bridgman .