The first downturn we have seen is on the value of our currency, which reflects the financial world’s opinion of our brave (or foolhardy?) decision to leave the EU.
Whether we voted Leave or Remain, we need to accept that economic change could have an affect on our business, and start looking at measures now that will give us confidence that our business that will survive, and potentially grow.
The focus on this post is worker productivity and output per hour; which is the statistic which gives us the amount generated per worker after costs have been deducted – so how much of that lawyer’s hourly rate is left after staff costs, premises, marketing, IT etc.
Aren’t lawyers already productive people?
But our professional services including law firms are not driving the long term rise in our productivity. They have been blamed for a shortfall in UK Productivity since 2008.
This is despite consistent growth in practicing solicitor numbers in the UK since 2009, nearly half of all UK law firms reporting an increase in gross income over the three years preceding the end of 2013/early 2014, and the UK’s top 100 law firms reporting growth in income over 2015.
This is matched in the USA, where top 100 law firm’s net income reported to The American Lawyer by law firms has grown by 3.3% over 2015/16.
What’s going on with net profit at law firms?
Growth in income is good, but the key statistic is net profit. In the UK, we have PwC’s report on the top 100 law firm finances, which highlights big differences between net profit margins in 2015:
– The top 10 law firms did not report an increase in their net profit margin.
– The next 11 to 25 reported a small increase in net profit margin of 1%, after a period of deterioration between 2008 and 2013. And
– The 26-50 position law firms posted only a 0.4 percentage point increase
– The next 51 to 100 posted their most significant fall in net profit margin in recent years, from 24.3% to 21.2%.
UK summary: Lots of big talk from the big firms, but profits aren’t going anywhere fast.
In the USA, enormous gaps and unexplained differences are seen through the US top 100 law firm’s reported figures – why do Wachtell have one of the fewest reported lawyers (261), but the greatest profit per partner ($6.6 million)? And why do Latham have the highest reported gross yearly revenue at US$2.65 billion, yet they have half the amount of lawyers to Baker and McKenzie, who reported the biggest decline in revenue per lawyer?
How is the mighty hourly rate spent?
Why is it that the net profit figures are not as promising as we would expect from that big hourly rate? The most common explanation is that lawyers use more of their time in non-chargeable activities, including compliance and business development.
But we’ve also seen some deregulation in recent years including a more flexible approach to training which firmly puts the individual lawyer and their organisation in control with identifying relevant training needs and how to go about their professional development.
Alternative explanations are:
a) We are not managing our business in a way which maximises net profit,
b) Lawyers are not working as efficiently as they could be, or
c) The business is not securing enough (or the right kind of) work.
What about making everyone work harder?
The best known approach to increasing productivity is to increase the billable hour targets for lawyers, which neatly delegates responsibility to the front line.
Although this could make a difference, as well as causing occupational stress for staff, it may also result in the racking up of time and costs that clients do not want to pay for, causing them to look for an alternative. There’s little debate that the billable hour method of charging suits law firms more than clients.
As a result of the “more billable hours” culture, lawyers at all levels are working harder than ever. Partners are spending an extra month and a half in the office over the year compared to 2014, and solicitors are using technology at home to keep up.
Does increasing fee income result in an equivalent increase in profit for the firm? Surprisingly, not always. PwC reported in their 2015 law firm financial survey that only 46% of all firms generated increased profits at a rate ahead of growth in fee income.
The Big Three
Getting a few extra billable hours a week out of lawyers most likely won’t make a big impact on our annual accounts.
To make changes that will last and ensure that the business remains competitive and productive net of costs, we need to take a long close look at these questions:
a) What are the big overheads that wipe out income? Are you sure they’re needed/cannot be changed?
b) Does our business structure either aid or hinder productivity and profit – can we afford to remain a partnership, or should we be finally looking into the tax benefits of that Company structure?
c) Could we change the head office business location to save tax, and to benefit from remaining in the EU? Remote working isn’t impossible for all law firms, and employees could remain in the UK within a branch office(s).
Looking at changes in these three areas is how we could be priming our businesses for a potential lean decade, or even two.
In Part 2 of this post, I look at some specific changes that we need to look at now to reduce our overheads BEFORE the economy starts to slow down as we begin the Brexit process.