LawFuel.co.nz – Small law firms have plenty of room for improved profitability if the results of Markhams’ Legal Practitioners Performance Survey for 2009 can be extrapolated nationally.
The survey found that many firms were challenged by the downturn this year, a trend the firm expects to continue in 2010 but concluded that firms need to work on a ‘strategy for success’ to bring themselves into the range of the top firms.
The full report can be seen at: NZ Legal
The Markhams’ survey includes 21 firms, including three large firms with six or more equity partners and based upon the Auckland regional market.
Interestingly, five of the 21 firms surveyed were sole practitioners with two of them ranked among the top 10 most profitable firms, although none were ranked among the top five most profitable firms.
Key Profitability Characteristic
Among the key characteristics of the most profitable legal firm were:
• Average gross fees per partner of $1.2 million
• Partner charge out rates of $400 plus
• Staff salaries to gross fees of 30-35%
• Staff to partner ratio of 5+:1
• Overheads (excluding interest and salaries) to gross fees under 30%
• Lockup WIP and Debtors of less than 23 months.
Among the main results shown by the survey:
• Seven of the top 10 firms ranked by profitability were located in the central city
• Charge out rates are a key factor in determining profitability with an average charge out rate for partners at $441 per hour
• Staff numbers play a key role in profitability with the top five firms )(by profitability) have 10 staff per equity partner compared to the bottom five firms with an average of two staff per equity partner
• Work-type did not show any correlation with profitability
“The combination of work in progress (WIP) and debtors, which is commonl7y referred to as “Lockup” per equity partner is an important indicator of a firm’s financial efficiency,” the report says. “If a firm is not managing work flow and billing and collection effectively this is often an indication that other work process4es are not being done efficiently.”
Lockup varied from 1.32 months to 4.04 months with firms having an average of 3.17 months worth of fees tied up as debtors.
“There appears to be an inverse relationship between practice efficiency and profitability. When sorted by profitability, the top five most profitable firms have an average lock kup of 3.31 months and the bottom five firms have an average lock up of 1.84 months.”
Reducing funds tied up in lockup increase firms gross incomes by reducing funding costs and freeing up capital for investment.
In terms of salary rates, the overage average of participants showed:
• Non equity partners – $179,000
• Senior solicitors (5+ years) – $110,000
• Intermediate Solicitors – $73,000
• Graduate Solicitors – $43,000
• Legal Executives – $68,000
The survey highlighted the variance in performance among the firms surveyed with a noticeable trend towards taking on non-equity partners through internal promotion or recruitment. “In nearly all cases non equity partners on a salary/bonus structure leads to higher profitability being achiever per equit5y partner in firms.”