Decade of decline

Costs and competition put squeeze on profits at Scottish law firms

legal services

Law firms of all sizes have seen a fall

Profits among Scotland’s legal firms have fallen by more than a quarter in the last ten years as competition has intensified and costs have risen, according to an analysis of the sector.

Median profits per partner over the decade have fallen by 26.9% from £104,000 to £76,000 last year.

All sizes of firms have experienced a fall in median profits per partner with sole principals (single partner) down from £92,000 to £48,290; 2-4 partner firms down from £108,000 to £76,925; 5-9 partner firms dropping from £105,000 to £99,198; and 10+ partner firms falling from £221,000 to £173,824.

The analsysis was conducted by accountants and business advisers French Duncan which compared the most recent Law Society of Scotland Financial Benchmarking report for 2018 with the Society’s 2008 Benchmarks and Costs of Time survey.

The profitability of firms in Scotland is lower than the rest of the UK. The RBS 2018 Financial Benchmarking survey indicates median profit per equity partner of £108,000.

In the 2008 report it stated that “the most profitable firms consistently achieve fees per partner better than £400,000 for firms with under 10 partners and over £800,000 for firms with 10+ partners.” By 2018 the highest income quoted in the survey in the 10+ partner firms’ upper quartile is £688,928 while the average upper quartile figure for firms under 10 partners is £333,877.

The legal sector has faced some serious financial issues over the last decade and the market remains fiercely competitive

– John Anderson, French Duncan

The 2018 report states that: “Taken together, the income and profit results suggest that firms are generating higher revenues through increased volumes of work, but that the work is less profitable. 10+ partner firms are able to absorb the less profitable work without the same impact on profit per partner as smaller firms.”

The median capital per partner has fallen substantially among the largest and smallest firms falling from £225,000 in 2008 to £96,545 in 10+ partner firms and from £63,000 to £23,276 for sole principals. Firms in between these two sizes have similar median capital levels across the ten-year period.

Worryingly bank balances ranged from £1,005 for the lower quartile sole principals to £1,083,513 for the upper quartile 10+partner firms.

John Anderson, entrepreneurial services partner with French Duncan, explains: “The legal sector has faced some serious financial issues over the last decade and the market remains fiercely competitive. A decade ago, few would have predicted that law firms would go bust and yet we all know of the losses in the sector which have occurred over the last five years.”

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