The profit trend
A breakdown of the 2005 Cost of Time Survey results as to firms' profitability, by size of practice and geographical area
Once again, a significant number of firms took part in the Cost of Time Survey – 277 firms, representing 22% of all firms in Scotland. Interestingly, 63% had participated last year with about 55% having contributed in each of the last three years. A 22% response rate is good compared with other surveys of professional firms.
The 277 firms comprise just over 1,700 qualified solicitors – of whom 700 were working in the 14 largest firms. In all, the firms had 2,500 fee-earners and a combined fee income of around £275m. £83m was in respect of court work and £22m was in respect of legal aid fees – approximately 15% of the total legal aid budget. The 14 largest firms had a combined fee income of £122m.
As illustrated in the chart, profits across the profession continue to rise, although the figures for the larger firms must be viewed with some care as they are based on a relatively small sample of firms.
In this year’s survey we have added charts that show the trends in profits over the last four years across four geographical areas:
We have excluded the larger firms with more than 10 partners from these charts due to the small sample size. Some of the sample sizes in the Aberdeen, Dundee and Perth category must also be treated with care. The other size groups however are based on larger samples.
Sole principals – widening gaps
Perhaps one of the most interesting features of these charts is the performance of sole practitioners – especially amongst “country” practices where median profits have increased from £40,000 to £70,000 since 2002. Based on the results of 69 firms this is a very good sample size. Equally it is disappointing to see the very flat profits sole practitioners in Glasgow have experienced over the last four years. £40,000 in 2002 and 2004, £50,000 in 2003 and 2005. Possibly these firms undertake more legally aided work, and there may be greater competition?
An income of £40,000 to £50,000 is relatively low reward for the risk and pressure of running a firm. A quarter of sole principals in Glasgow and Edinburgh earned profits of under £25,000. The chart of salaries suggests that median salaries for associates in Glasgow were £36,000, with a quarter earning over £39,000; and a median of £38,000 in Edinburgh.
There are many attractions to running your own firm – independence, freedom, being one’s own boss – but there are downsides and responsibilities. One of those responsibilities is arguably the creation of a viable long term business that provides security of income and employment for both the sole principal and his or her staff. Some of these firms earning low profits will be relatively new and in due course profits should rise. Others however will be long established and have always struggled.
Surviving on legal aid
Many of these firms will have limited choice about the work they do – legal aid may be all they know, and their local area may offer limited good-quality private work. Evidence from south of the border suggests that some firms on legal aid rates can achieve reasonable profits – provided work is done at the correct level and is undertaken in some volume. This implies more junior fee earners as opposed to equity partners actually doing the work – provided they are well supervised. It also implies good IT and efficient procedures.
It is also important that firms make the most of private work that is available and take every opportunity to diversify. Cross subsidy from other work types can help to boost overall viability and reduce the risks that low profits can bring.
The last four years have seen a sustained increase in the profitability of smaller firms in country areas. Could the next four years see the same happen in Glasgow?
All participating firms receive a free copy of “The 2005 Survey of Law Firms in Scotland”, the detailed report upon which this article is based. They also receive a free confidential individual report. Other firms can obtain a copy of the full report which contains a wide range of useful statistics and performance indicators, from Lisa Hamilton at the Society on 0131 476 8164 (e: email@example.com).
In April the President will be writing to all firms inviting them to participate in the 2006 survey. Participation is free and this year carries a three hour CPD credit as well as an individual report on cost rates in the firm and a copy of the survey report. In recent years there has also been a prize draw. Last year the £700 prize was won by Alison O’Neil of Dumbarton. The Society is again grateful to Alex Quinn and Partners for sponsoring the prize in 2005.
Andrew Otterburn is a management consultant and for many years has run practice management seminars on behalf of the Society. He has helped in the development of the Cost of Time Survey since 1999, working initially with Professor John McCutcheon and now with Dr John Pollock. His book, Profitability and Law Firm Management, is published by the Law Society in London.
Dr John Pollock, a consulting actuary, has been responsible for the administration and statistical aspects of the Cost of Time Survey since 2002. John is well known to personal injury, employment and family law solicitors in Scotland through his expert witness work at Pollock & Galbraith Consulting Actuaries.