The pandemic has taught many small and medium-sized law firms the benefits of providing services that suit their clients rather than themselves, according to Law Society research.
Covid proved an unexpected financial boon after the initial gloom, with 69% of firms attending the law management section’s annual meeting financial benchmarking survey reporting year-over-year fee growth in 2021, with 40% seeing double-digit growth; 75% saw their profits increase.
“Our experience is that many companies have continued to post strong financial performance through 2022, as workflow remains strong in most areas,” the study said.
“However, the challenge will be to sustain the increased levels of profitability in the months and years to come.”
There were pressures to raise wages to retain and attract staff, as well as sharp increases in professional indemnity insurance premiums and the increase in employers’ national insurance earlier this month.
The report, written by Hazlewoods accountants, revealed “a sincere belief that the new efficiencies that remote working can bring are real”, as well as an acknowledgment that staff well-being and motivation were highest where more flexible working arrangements were offered.
He said Covid has shifted customer expectations “away from what can be long face-to-face meetings each time, and more towards faster overall service levels”, with greater use of technology by people paving the way for “significantly improved means of sharing and performing legal documents electronically”.
In addition, communication methods have become more controllable, with improved electronic operation, “thereby improving service levels and reducing risk”.
The pandemic has spurred a greater willingness among law firms to try new approaches, “and as a result, the belief has accelerated that they can lead to efficiencies, better service, and a generally improved working life”.
The report concludes: “Many companies are now beginning to focus on designing customer experiences that actually work for the customer, not just themselves, and in doing so they are finding that delivering services that better suit the customer is actually more efficient anyway.
The report, now in its 21st year, is one of the largest of its kind, with the 206 participating law firms comprising nearly 12,500 partners and employees with combined fee income of $1.1 billion. pound sterling.
Commission revenue increased by a median of 6.2% between 2020 and 2021, the strongest growth in seven years. Businesses in all parts of England and Wales saw the growth, and fees also increased across most types of work, especially conveyancing and employment.
“In our experience, most conveyancing companies increased their fee rates several times in 2021 and have not reduced them since,” the researchers noted.
Salary costs as a percentage of fee revenue declined, which the report attributed to furloughs, delays in awarding salary reviews and promotions, and fees per employee rising more than salary increases.
Non-salary overhead as a proportion of fee income also fell, with cuts in marketing, accommodation and other accommodation costs.
While the median fee income per associate increased by 8.3% in 2021 to £825,331, the median cost per employee increased by only 2.6% to £59,438.
Median spend on support staff fell slightly to £23,957 per employee, while median spend on non-salary overhead costs per employee rose 2% to £38,293. As a proportion of fee income, general non-salary expenses fell from 30% to 28%.
The total number of year-end blocking days (WIP and debtors combined) also decreased, from 142 days to 135.
The median hourly cost of an employee (based on 1,100 billable hours per year) was £110.63, compared to a median hourly cost of £122.54.
Median net profit per partner (before notional partner salaries) jumped 39% to £203,199; adjusted to include a notional wage cost as well as notional interest on the partner’s capital, to create the ‘super profit’, the figure nearly doubled from the previous year to £102,097.
Only 11% of companies reported a “super loss” in 2021 – the lowest in many years.
All of this means that the financial stability of companies has improved considerably – total partner withdrawals exceeded profits in only 11% of companies in 2021, compared to around a third in each of the previous four years.
Some 83% of companies have claimed furlough money and 11% have it or intended to pay it back. Three-quarters borrowed money through the Bounce Back Loan Scheme or the Coronavirus Business Interruption Loan Scheme – median amounts were £50,000 and £350,000 respectively – but many businesses still haven’t used the money , preferring to keep it ‘just in case’.
The report says some companies used the money to fund their professional indemnity premiums, as interest rates were generally lower than with more traditional financing options.