Judicious fiscal management grows some law partners’ income

22 November 2010

MEDIA RELEASE

Judicious fiscal management grows some law partners’ income

There is huge variance in the financial performance and success of Auckland legal firms according to the latest Auckland Legal Practitioners’ Performance Survey report released recently.

“This is a tough and very different marketplace compared with just three years ago. Firms that are not in the top five of our survey should be looking at strategies to bring their results to within this range as a strategy for success,” says Sam Bassett, Auckland director of Markhams Chartered Accountants and Business Advisors, which has conducted the survey for the past four years.

The top five most profitable firms reported an average fee income of $1.3million compared to $1.4million per equity partner in the previous year.

“Despite the recession, fee income has not been impacted as adversely as anticipated in fiscally strong firms. Prudent practices have been able to maintain higher net incomes per equity partner through tighter management of salaries and overhead costs.

“Of the 12 firms who participated in 2009 and this year, half had lower turnover than 2009, but eight out of the 12 had higher net incomes than in 2009,” cites Mr Bassett.

Survey findings highlight that some individual law firms continue to feel the pressure of the recession, particularly smaller firms where conveyancing and general commercial work make-up a significant portion of their practice income. In other practices, net incomes have been affected by static or declining fee levels with firms locked into expensive leases and overhead costs.

“In one example, a sole practitioner’s net income decreased from $423,000 in 2008 to $350,000 in 2009 and then to $226,000 in 2010. The reduction in gross fees due to the recession and the decrease in transactional-based legal work, has lead to this practice’s net income decreasing by 47 percent.”

The report highlights characteristics of a profitable legal firm, recommending the ratio of overheads (excluding interest and salaries) to gross fees of under 30 percent.

“Staff salaries to gross fees should generally be 30 to 35 percent, variable if gross fees are significantly higher. A staff to partner ratio of 5+:1 is desirable, however with specialisation this ratio can be lower. The ideal hourly charge-out rate is $400 plus an hour,” advises Mr Bassett.

“Astute financial management and lock-up of work in progress and debtors to less than three months, is critical to smooth cashflow.”

The average number of non-equity partners has decreased, possibly attributed to partners moving from existing firms to smaller practices or setting up on their own.
“Anecdotally, we are aware of partner firms who are down-sizing with the highest economic earner setting up on their own, or where the lowest earning partner is being forced out.

“Looking ahead, we believe there will be an adjustment phase or ‘reshake’ as businesses realign to the new economic conditions, particularly where transactional activity is greatly reduced,” says Mr Bassett.

An initiative of a legal industry business development unit of the chartered accountancy group, the regular Markhams survey, conducted in the Auckland marketplace, covers topics such as practice profitability, efficiency, work type, hours, salary comparisons, and professional indemnity insurance.

The survey report is made available free to industry participants and copies can be sourced from Markhams Auckland office.

ENDS

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