Fresh challenges but new opportunities, Financial Benchmarking Survey shows

But there are early signs the outlook might not be quite as rosy as hoped.

Fee earner gearing (the ratio of fee earners to equity partners) slipped from 7.7:1 in 2022 to 6.8:1 in 2023.

In improving economic conditions, the ratio of fee earners to equity partners tends to increase as firms grow, with the opposite happening in times of recession.

Factors that may be impacting gearing are the challenges firms face attracting and retaining high-quality staff and the resulting impacts on workload and wellbeing.

Last year, managing director Philippa Hann provided tips on how to manage staff burnout and a busy workload.

“I am concerned about productivity, pay and talent retention, but also burnout among staff,” says Philippa.

“People feel overwhelmed and overworked but productivity rates are falling. There is no quick fix: it’s all about getting the right systems in place.”

Kerry Slater, psychotherapist and director at the Workplace Collective agrees.

“Packed caseloads and tight deadlines, tricky clients with complex material, 24/7 communication channels, highly commercial competitive environments, and varying degrees of psychological safety and autonomy all take a toll.”

Kerry recommends focusing on culture change: “Promote the importance of supervision, inclusivity and staff psychological support”.

“An important first step is identifying and engaging key stakeholders in that conversation.”

Falling chargeable hours show the importance of time recording

After falling to 816 in 2022, the number of chargeable hours recorded by fee earners has continued its downward trend, dropping further to 793.

These findings are likely to be a surprise, as the general rule of thumb is that fee earners should charge between 1,000 and 1,100 chargeable hours a year.

It is unclear from the survey why chargeable hours are so low – whether this is informed by cultural issues around time recording, an increase in non-chargeable obligations (such as training, business development and admin) or something else.

Without knowing how long it takes to do a job, you will be unable to tell if it is profitable or whether individual fee earners are working efficiently.

Capturing all time spent on a client matter, for all work types, is essential.

You may want to consider introducing training on time recording, pricing and lock-up to make sure fee earners understand the importance for profitability.

How do you get the best out of your team? According to consultant Peter Scott, it’s all about identifying team objectives and enhancing performance to meet them.

“Law firm leaders cannot do it all alone – they need to be supported by strong teams around them,” Peter shares.

“It is important to understand that your team will want to know in which areas their performance will be measured and what will their performance goals be.”

Profits propped up by high interest rates

After reporting higher than expected profitability during the pandemic, levels of profit per equity partner (PEP) returned to pre-COVID patterns in 2022.

In 2023, PEP fell for the second year in a row, though by a relatively modest amount (-0.7%).

This year saw a steep increase in interest received on money held in client accounts. Total net interest income rose over 1,000% to £27.5 million, compared to £2.6 million in 2022.

However, this comes with a warning that interest income is likely to be a temporary bonus, rather than a sustainable element of profitability.

Removing interest earned, 2023 PEP fell by 7.85%. This may be a more realistic measure of the fall in sustainable trading PEP across firms.

Despite the rise in interest income, median net profit margins fell from 22.3% in 2022 to 21% in 2023, with the smallest firms seeing the largest fall (from 30.6% to 24.4%).

Over a quarter of fee income was spent on non-salary overheads, with firm budgets being squeezed by increases in professional indemnity insurance (PII) and marketing costs.

However, Chris Marston, chief executive of LawNet, thinks it’s likely there are better times ahead for PII.

Chris reports that there has been “more competition between insurers, some new and returning insurers looking to write more business (cautiously and selectively), while others mounted campaigns, targeting a part of the market they find particularly attractive.”

But of course, it’s not all about cost reduction. Emma Egerton-Jones shares her advice on how to win clients in a cost-sensitive economy.

“The current legal market is fluid,” Emma says. “High expectations, reduced patience, lack of tolerance and economic pressures motivate clients to change providers at the first hint of dissatisfaction.”

“While that can present a challenge for client retention, it also poses a great opportunity to win clients from other firms.

“Quick, low-cost wins – such as client experience, content marketing and a conversion framework – can boost your client attraction without requiring increased business development activity from already stretched fee earners.”

Looking to the future

Key to meeting the ongoing challenges in the sector is getting the most from staff, providing the best possible client service effectively and charging for it accordingly.

"Although law firms are proving to be financially strong and resilient, we live in tough economic times,” said Law Society president Nick Emmerson. “This survey is an opportunity for law firm leaders to plan for the future."

"Despite costs rising and billable hours decreasing, profits have only marginally declined – albeit propped up by high interest rates.

“The legal sector remains healthy, continues to be an important driver of the UK's economy and a significant employer. In fact, the overall number of people employed by law firms has risen, even if the lack of government investment in legal aid is hitting some firms hard.

“In the current crisis, solicitors are needed more than ever to help people access justice in their time of need. The government must take action to address the deficit in legal aid now.”