Law firms must “prioritise profitability” as sector recovers from Covid-19 pandemic – Law Society

Six in 10 law firms recorded a growth in revenue in 2020 despite the coronavirus pandemic, a major study has revealed.

But the research, published by the Law Society for England and Wales, suggests that rising costs could hit profits by around a quarter.

The findings form part of the regulator’s new Law Management Section Financial Benchmarking Survey 2021 report, providing an early insight into the impact of the Covid-19 outbreak on the sector.

According to the report, some 60 per cent of law firms recorded year-on-year growth in 2020, with one in four of those reporting growth of more than 10 per cent.

As a whole, the sector grew by 1.6 per cent – the smallest increase in nine years, but encouraging considering the unprecedented business environment.

It was also found that income per equity partner increased by an average of 3.7 per cent, from £775,515 in 2019 to £804,437 in 2020.

However, a significant rise in overheads overshadowed any gains in revenue, resulting in an annual fall in profits. The study suggests that median spend on non-salary overheads per fee earner (which includes everything but salary costs) grew by 4.5 per cent.

The additional overheads of running a law firm are expected to be sustained in 2021, meaning law firms are projecting a median reduction in profits of 24 per cent and an expected fall of income of 15 per cent.

Firms also reported a drop in profits per equity partner for the second year running – with a median drop of 6.9 per cent for participating firms. Despite increased fee income, overheads grew more quickly than fees, leading to this fall in profit.

Commenting on the report, Paul Bennett, chair of the Law Society’s Law Management Section said: “The trends are reassuring to law firms as managing a law firm can be challenging at any time, but COVID amplified the challenges.

“However, the trends evidenced will help those reviewing the benchmarks to develop their own firm for the better in the medium to long term. The increasing cost base of professional indemnity and IT will not surprise anyone but does highlight the importance of growing the income.

“Growth must be with a focus on profitability as we emerge from the pandemic. The strong year on year income growth of 60 per cent of the firms surveyed confirms there are opportunities for firms to increase market share and to thrive. There are clear green shoots and opportunities to increase the long-term financial rewards but this data is from the first wave of the pandemic challenges so we will no doubt see trends develop in next year’s survey.”

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