Key findings
In conjunction with the ILFM
The tide is turning:
Back to the office
Optimism in numbers:
Change is good
1
%
of firms expect people to be back in the office more than 50% of the time.
1
%
of firms are expecting increased revenues in the current financial year.
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Closing the gap: Fees per partner
Tax changes:
A double-edged sword
£955,000
£1.04 million
Assist businesses
BUT
concerned higher taxes will be brought in.
City
Region
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1
%
1
%
Growth in action:
firms are thriving
High alert:
Phishing concerns continue
Quarterly or monthly
cyber training
concerned with
phishing campaigns
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%
1
real term growth
in revenues
Less than
£100,000
Partnership capital:
A tiered overview
More than
£250,000
%
42
79
%
Top tier
Other
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Total headcount
Fee earners per partner | 4:1
Support staff per partner | 3:1
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130 days
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Lock-up periods:
firm comparison
Interest on client account
179
days
More than £1 million for
More than £1 million for
More than 10% of turnover for
130
days
35
% of firms
17
% of firms
City
Region
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"A backdrop of change provides firms with opportunities. There are challenges to be made with working capital and how to capitalise on people working with AI."
"Positive news! Firms performed better than expected, the legal sector continues to thrive."
"It is crucial for firms to stay vigilant and provide regular cybercrime training to their people, ensuring they can effectively identify and respond to potential threats."
"Lock-up days continue to increase, so it will be interesting to see if that trend is reversed next year."
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Ben Carter
Director,
Professional Practices
Nicky Owen
Partner
Head of Professional Practices
Nicky Owen
Partner
Head of Professional Practices
Ben Carter
Director,
Professional Practices
Providing clarity:
Our insights
Back to top
Optimism in numbers: Change is good
Lock-up periods: firm comparison
Partnership capital: A tiered overview
The tide is turning: Back to the office
High alert: Phishing concerns continue
Total headcount: Up by 4.1%
Closing the gap: Fees per partner
Growth in action: Firms are thriving
Tax changes: A double-edged sword
Interest on client accounts
The workplace is experiencing a change as firms are looking to their people to change the balance of time spent between being in the office and working from home. This is a drive for firms to improve productivity and to provide an environment in which people learn and develop.
Interestingly, the expectation in Regional firms is different to City firms.
75% of Regional firms expect their people to be in the office three or more days a week. Whereas 50% of City firms expect their people in more than three days a week.
14% of Regional firms expect their people to be in the office all of the time. This is just not the case for City firms; there is a clear expectation for people to spend at least one day at home. Is this simply an opportunity for London commuters to have a day where the usual commute is traded in for a day focusing on work in hand?
32% of City firms expect their people to be in the office for two days a week and it is clearly unacceptable to be in the office only one day week, whereas 14% of Regional firms expect their people to be in either one or two days a week.
Partnership capital indicates each partner’s equity stake in the firm. This is essential for understanding profit distribution, partner compensation, and the overall equity structure, which can impact partner satisfaction and retention. Firms with robust capital accounts are better positioned to weather economic downturns and unexpected expenses, ensuring continuity and stability.
Firms fall into two camps with regard to partnership capital:
- The first is having set levels for different bands/groups of partners. For example, equity partners contributing say £50,000 of capital and then senior equity partners contributing say £150,000.
- The second is for partners to contribute a base level and then additional capital is based on a point system - more points mean more capital contributed.
Firms generally rarely review capital levels, when in reality management should annually in connection with cashflow forecasting reflect and actively consider whether current capital levels are sufficient. Future expansion, property moves, fit outs and economic crisis will all impact on cash management.
For firms impacted by basis period reform, tax reserves will be eroded and working capital squeezed and of course firms should be reflecting on whether partnership capital should be increased.
32% of firms have either increased partnership capital levels in the last 12 months or are planning to in the next 12 months. For 68% of firms, their “junior” equity partners are contributing £50,000 or more. Interestingly, for 8% of firms their partnership capital is more than £500,000.
Cybercrime and fraud resilience are considered to be either high priority or business critical for 97% of firms for the next few years.
Very significant or somewhat significant priorities are seen to be:
- colleagues being targeted by phishing campaigns - 98%
- a successful attack against the firm – 91%
- lack of cyber security awareness at firm level – 79%
- lack of cyber security awareness at board level – 60%
These stats are set against a backdrop of only 32% of firms providing either monthly or quarterly training to its people. It seems that firms are confident that senior management would respond effectively in the event of a cyber-attack. With the ever-increasing threat of a successful cyber-attack, firms need to ensure that their people have the knowledge to spot potential threats.
Management are no doubt working with their IT teams behind the scenes minimising the threat that they potentially face through penetration tests and sending “test phishing” emails to their people. Perhaps the training requirements are focused directly on those individuals that are likely to click and open external phishing emails.
Fees per partner dipped by 1% in the City when compared to last year, whereas Regional firms saw a 5.9% increase and hence the gap between fees per partner has narrowed between Regional and City fees.
The fees per fee earner, including partners increased by 5% in City firms to £284,782 and by 3% in Regional firms to £146,487.
This is supported by the change in headcount in fee earners in Regional firms which increased by 9.5% and by 2.1% for partners; whereas City firms saw fee earners increased by 1% and partners by 6.3%.
A new government brings change, which we know is good for professional practice firms.
However, the leading theme was that the new government needs to assist professional practices by making tax changes that will benefit firms and its people. This was reflected both in City and Regional firms. This was followed by new investment, sector changes and financial stability.
Firms are overwhelmingly concerned that the new government will introduce higher taxes. This could be seen as an increase in rates but also a widening of the net. Firms are also concerned around changes in the law; this could be changes in employment rights and the salaried member legislation which will all impact law firms.
We all know that 2024 will be a year of change across the globe and in particular geopolitically. There is uncertainty - AI is changing the way we work. The way we engage, motivate and retain our people are all challenges that all firms are facing.
Within Professional Practices, change is usually good and that goes for law firms; 89% of firms expect revenues to increase in this current financial year. That is fantastic. The challenge will be to manage expenditure and increase profits per partner.
Any new government wants to instil change and the UK government is no different. We all know there is change ahead which brings opportunities; our people and firms need to capitalise on these.
Change is good but there is hard graft to put in and manage clients and the wellbeing of our people, our key asset within law firms and professional firms alike. Our people are not necessarily working the way they did pre-Covid and values are different and these need to be managed effective.
Revenue growth and profitability are fundamental indicators of a law firm’s financial health and market competitiveness. Tracking these metrics helps firms understand their financial performance relative to peers and identify areas for improvement.
With inflation peaking at 11%, we were expecting revenues to increase, but it is interesting to see that 39% of firms increased their revenues over and above the rate of inflation. City firms performed well with half of them hitting more than the inflation rate and for Regional firms the rate dropped to a third.
However, when the results are split by size of firm it is clear that larger firms found it easier to weather the storm, which is no surprise, as they will have depth and breadth of different services and the partnership model works well. Whereas 74% of smaller firms, with revenues less than £10 million faced an increase less than inflation or a fall in revenues overall.
We all know that more can be done to improve lock-up and that in times of economic crisis lock-up management is really important. Cash is king!
The basics are key and if firms can build efficiencies into the process and automate parts of the process, improvements will be seen. If work in progress (WIP) is billed on a timely basis and fees are actually sent out on the day authorised, followed by a robust follow up on unpaid debts, lock-up can be improved.
How do firms disseminate the importance of the timing and the process to teams and individuals within their firms?
As expected with the economic crisis, lock-up has increased, and this is as a result of debtor days increasing for both Regional and City firms. WIP days remain on average 60 days.
Last year firms were conscious that pricing and economic inflationary risk were disrupters, 90% of firms said that they actively focused on improving lock-up was one way of dealing with it. An increase of four days for both City and Regional firms is no doubt a good result overall.
Headcount increased for 71% of firms and personnel costs increased to pay competitive salaries to their people and retain talent and keep on top of the war on talent.
The average cost per head increasing to just under £80,000 in the City and £44,000 in the Regions.
The staff cost as a percentage of turnover has remained static at 37% for City and 47% for Region firms.
A fascinating statistic is the number of fee earners (average four) and support staff (average three) per partner. Do partners, especially new partners realise that this does not just include people in your team but the wider firm too?
The rise in interest rates generated interest on client accounts at levels not seen for years. 41% of firms generated client account in excess of £1 million, the highest being in excess of £7 million. 72% of firms generated more than £250,000.
Interest rates have been low for so long that finance teams are not necessarily used to seeing such levels of interest being generated and the corresponding implications that can arise.
With more than 78% of firms generating client account interest in excess of 1% of their turnover which could be considered no longer incidental for VAT purposes, have firms considered the implications for the recovery of their VAT incurred on their costs under the partial exemption VAT rules?
Interestingly, 20% of firms do not know whether they should be deducting withholding tax from interest payments made to clients. The process is quite different from a UK limited company withholding tax from amounts paid to clients.