Financial Benchmarking Survey of Solicitors Firms in Ireland 2015/16. In association with The Institute of Legal Accountants of Ireland

Transcription

1 Financial Benchmarking Survey of Solicitors Firms in Ireland 2015/16 In association with The Institute of Legal Accountants of Ireland

2 Contents Page 1 Introduction 1 2 Profitability 2 3 Lawyer and staff ratios 5 4 Fee income 7 5 Salary ratios 9 6 Overhead ratios 11 7 Working capital 13 8 Cost per hour 17 9 Conclusion 18 Otterburn Legal Consulting LLP 1 Holme View Park Holmfirth HD9 3HS +44 (0) (tel) andrew.otterburn@otterburn.co.uk Otterburn Legal Consulting 2016 Financial Benchmarking Survey of Solicitors Firms in Ireland 2015/16 ii

3 BACKGROUND The Institute of Legal Accountants of Ireland The Institute of Legal Accountants of Ireland was founded in 1986 by a group of people who recognised the need to establish and maintain standards for Legal Accounting in Ireland. The institute's membership currently includes accountants, solicitors, book-keepers, computer operators and computer suppliers. The Institute has close links to the Law Society of Ireland. The Institute holds an annual conference in September or October each year. These conferences offer a comprehensive programme of topical presentations and events relevant to those working in legal accounting and practice administration. The conference also provides a useful forum for exchange of views between members. Links to recent Conferences can be found at the bottom of any page on our website. The Institute operates a members only mailing list which provides updates and takes questions from members. Other members contribute with solutions and advice. There has emerged over the years a practice of members being able to contact other members for advice and guidance. The Institute is run by a Committee which is elected each year at the Annual General Meeting which is held in the Law Society usually in January. The Institute also holds a members meeting in Apr-May each year. Members meetings normally include a presentation on a current topic of interest. In 1990 the Institute formed an association with The Institute of Legal Cashiers and Administrators in England and Wales and this has proved beneficial to both Institutes. In 1998 our Institute also established links with the Society of Law Accountants in Scotland. All Institute Presentations and conferences are acceptable for CPD. The Institute can provide CPD at extremely competitive rates to local Bar Associations or other groups. OBJECTIVES To provide an independent and professional body for persons associated with accounts, bookkeeping and administration in law firms. To promote studies, research and exchange of ideas in modern methods of accounting, bookkeeping and practice management in law firms. To foster, protect and promote the interest and status of our members; to promote honest ethical practices and to settle disputed points of practice. To encourage the improvement of accounting methods in both manual and computerised systems. To organise by itself, or by association with approved organisations; seminars and conferences to further the knowledge and expertise of those in the Legal Accounting profession. To provide recognised qualifications for our members and to maintain standards by a system of examination and research work. To encourage young people to take up Legal Accounting as a profession. To provide advisory assistance to members and to solicitors on accounting methods and systems. To provide an independent and professional organisation for persons associated with the accounts, book-keeping and administration in solicitors' practices. Mary Hawkins, Rinn, Oranmore, Co Galway Financial Benchmarking Survey of Solicitors Firms in Ireland 2015/16 iii

4 1 Introduction We have been undertaking Financial Benchmarking Surveys for firms in Ireland since 2003 and this year s survey is based on completed questionnaires from 12 firms. Four of these are based in Dublin and eight were from elsewhere in the country. Most of the firms took part in our last survey, which was undertaken in 2013/14. The firms had a combined fee income of 14.5m. In total they had 77 lawyers, 89 support staff and 20 apprentices a total compliment of 186 partners and staff: Equity partners 24 Salaried partners 3 Assistant and Associate solicitors 41 Consultants 5 Other fee earners 4 77 Secretaries 56 Other staff (reception, accounts, etc) 33 Apprentices This year the average firm had 5 fee earners in all. Most of the participants had year-ends in the latter part of Two had 2016 yearends. The purpose of the Survey is to help the participants benchmark themselves with others and identify areas they could improve. In addition to this report each participant will receive an individual summary of the key figures for their firm. In the report we have included charts for each benchmark. Each graph shows the median, and lower and upper quartiles. The median is the middle value in the range and is not influenced by the magnitude of the extreme values (as is the arithmetic average or mean). The lower and upper quartiles indicate the range of values. 25% of firms are below the lower quartile, and 25% of firms are above the upper quartile. We are delighted that the Survey has once again been supported by The Institute of Legal Accountants of Ireland and would like to thank their Chair, Miriam Carroll for her huge efforts encouraging their members to take part. Financial Benchmarking Survey of Solicitors Firms in Ireland 2015/16 1

5 2 Profitability The first two charts illustrate the average profit per equity partner achieved by the firms the total profit of the firm divided by the number of equity partners: Financial Benchmarking Survey of Solicitors Firms in Ireland 2015/16 2

6 The first chart indicates a median of 167,000, up from 153,000 in 2013/14 and 139,000 reported in 2011/12 but not quite back to the 2009/10 level of 186,000. These profit figures are before allowance for any notional equity partner salary however they have been adjusted to reflect a commercial rent where the partners own their offices. The figures show a significant reduction compared to what firms enjoyed before the recession however, even these relatively low figures are better than those being achieved in the UK. The latest report published by RBS/NatWest indicates a median profit per equity partner of 111,000. Against these figures the profitability indicated in this survey is actually very good. This survey will not be representative of the profession as a whole as the average firm size is slightly higher than the average firm in Ireland. This survey also does not include any of the large Dublin firms and the profitability of the large Dublin firms is obviously significantly better. The economy has improved over the last four years, especially in the Dublin area and this is reflected in the table below, which shows healthy improvements, especially in commercial work. Eleven of the firms provided details of their fees by work type for this year and the year before and this indicates an overall increase of 13%: Fees Total fees This year Last year % change Residential property 3,082,768 3,002,913 3% Probate, wills and trusts 1,396,350 1,391,518 0% PI 1,593,851 1,477,445 8% Corporate & Commercial 1,112, , % Commercial property 1,832,784 1,446,818 27% Litigation** 2,326,797 1,982,582 17% Family 664, ,485 18% Crime 578, ,494 9% Other 1,265,337 1,368,798-8% Total 13,852,947 12,311,344 13% Financial Benchmarking Survey of Solicitors Firms in Ireland 2015/16 3

7 We once again include the chart below that indicates how dependent firms are on property work commercial and residential combined. Prior to the recession most firms were obviously over dependent on property work and the chart below indicates that this year property accounted for 41% of the fees: Back in 2007/08 the median was 34%, and a quarter of the participants were dependent on property for more than 50% of their fees, so firms are starting to become over dependent once again. Sections 3 to 8 examine the underlying factors that determine profitability in more detail. Financial Benchmarking Survey of Solicitors Firms in Ireland 2015/16 4

8 3 Lawyer and staff ratios The profitability of a firm of solicitors is related to a number of factors including: the type of work undertaken; the quality of its client base, in particular its ability to generate repeat work; the quality of its lawyers (although the definition of quality will depend on the type of work undertaken; its profile and how effective it is at marketing, and making it perceived as being different to others; its management, in particular its financial management; its size because larger firms can develop better team structures; its use of IT and the strength of its systems, especially those relating to risk; its structure in particular the ratio of its lawyers to equity partners. This section details two ratios. The first, the ratio of lawyers 1 who are not equity partners to equity partners a firm s leverage 2, or gearing, and shows a median of 1.6. Generally, the higher a firm s leverage the better its profitability, provided that: You have appropriate work that can be delegated to these lawyers; You have sufficient volumes of this work; They are properly managed and supervised. 1 Lawyers does not include trainees 2 For example, a firm with two equity partners and a further two other lawyers (say, an assistant solicitor and a legal executive), would have a leverage of 1. If it had a further two lawyers it would have a gearing of 2. Financial Benchmarking Survey of Solicitors Firms in Ireland 2015/16 5

9 The second benchmark deals with the ratio of support staff to lawyers. This will include secretaries, other support staff such as cashiers and reception, and apprentices. A wide range 3 is indicated with an overall median of 1.6: The focus for many firms in recent years has been on improving their systems and ways of working. Many have started making better use of technology. It is important to make sure that fee earner efficiency and overall profitability is not impaired by cutting support staff levels too far. Some firms only achieve the profit levels they do because their fee earners have adequate support. The important point is that each firm, no matter its size, needs to look carefully at its current and anticipated staff levels. The partners need to consider, in the light of the technology now available, what levels of support staff are required in order to produce work efficiently and on time, and what calibre of staff are needed. 3 A firm with four lawyers supported by three secretaries, a receptionist, an apprentice and a cashier would have a ration of 1.5 (6/4). If there were just two members of support staff in all, the ratio would be 0.5 (2/4). Financial Benchmarking Survey of Solicitors Firms in Ireland 2015/16 6

10 4 Fee income This section looks at two benchmarks fees per equity partner and fees per lawyer 4. The former is especially important as the relationship between fees and the number of equity partners is a key figure to be aware of. The chart shows a huge range and it will be clearly be much easier to achieve reasonable profits when this figure is over, say, 600,000 per partner, than when it is below, say, 400, Excluding trainees Financial Benchmarking Survey of Solicitors Firms in Ireland 2015/16 7

11 Median fees per lawyer this year is 184,000: Most firms monitor fees per lawyer in some detail it is the one report most partners look at. It must however be treated with care. As indicated earlier, the key to profitability in many practices is leverage and that implies a willingness for work to be passed to the appropriate person that might be someone in a different department or office, or could be someone more junior. Firms that are too pre-occupied with individual fees can find lawyers are reluctant to pass work to others, hence rendering attempts to develop teams or areas of specialisation very difficult to achieve. Financial Benchmarking Survey of Solicitors Firms in Ireland 2015/16 8

12 5 Salary ratios This section provides two salary benchmarks: Staff salaries as a percentage of total fee income; All salaries (including a notional salary for each equity partner) as a percentage of total fee income. The first of these is 37%. Before the recession this was at 33% so has not yet recovered its pre-recession position. This measure is based just on the employed solicitors and other staff, and whilst of interest is of relatively limited value from a management perspective as it includes no cost for the equity partners. The second set of charts in this section includes a notional salary in respect of these people - in effect, a cost for them in their capacity as a fee earner or manager. Financial Benchmarking Survey of Solicitors Firms in Ireland 2015/16 9

13 The chart is based upon the actual salary expenditure for staff and salaried partners (including PRSI and employer s contributions for staff pensions) plus an appropriate notional salary for the equity partners. The notional salary was calculated by taking the median salary of the highest paid employed fee earner from the firms of 48,000 and making an allowance of 33% in respect of the additional costs that would have been paid if the partner had been employed (PRSI and employers pension contributions), together with an allowance for the additional value an equity partner provides. This resulted in a figure of 65,000, which has been used as the notional salary in this calculation. For firms that wish to improve their profitability, this ratio is one of the most important indicators they should monitor. More so than overheads, which are often relatively fixed, any improvements to this percentage are likely to result in increased bottom line profits. It should also be remembered that this ratio is not about reducing salary costs it is concerned with the relationship between fee income and the basic cost of producing that income the cost of the people in your firm. Other areas to consider include: The allocation of work - is it being done by an appropriate level of lawyer and by the right department? The number and quality of your staff (and partners); Your use of information technology. Financial Benchmarking Survey of Solicitors Firms in Ireland 2015/16 10

14 6 Overhead ratios This section examines non-salary overheads rent, telephones, printing, stationery, IT, marketing, etc, as a percentage of total fee income, and as an amount per lawyer. It includes an adjustment for a notional rent where the partners own their offices. This benchmark stands at 29%, very similar to the previous two surveys. A good target will be to reduce this back to 25% however that is only likely to be achieved by an increase in fees. Overheads per lawyer is a very useful figure to be aware of and this year stands at 57,000. The main items of expenditure that can easily be reduced are investment areas such as marketing and training, and firms will very probably find a point will have been reached where these will need to be increased as they, sometimes for the first time, have to actively seek work, improve skills through training and efficiency through better use of IT. Financial Benchmarking Survey of Solicitors Firms in Ireland 2015/16 11

15 As discussed in previous years, it can be useful to calculate the total cost of employing a fee-earner the amount he or she needs to bill before making a profit. This is an easy calculation and can be worked out by adding the average non-salary overheads per lawyer for your firm to the lawyer s actual salary, the salary of their secretary (or share of a secretary), and their share of other support staff (reception, cashiers, juniors) to determine the total costs they need to recover. This is illustrated below: Total costs of a lawyer Solicitor salary (say) 40,000 Secretary salary (say) 15,000 Share of central staff (say) 10,000 65,000 PRSI (Say 10.75%) 7,000 72,000 Average non-salary overheads (per lawyer) 57,000 Total amount lawyer needs to bill before they start contributing to profit 129,000 Financial Benchmarking Survey of Solicitors Firms in Ireland 2015/16 12

16 7 Working capital Once again this year we asked for details of each firm s bank balance / (overdraft), for details of partner capital, and also debtors, work in progress and amounts owed by clients in respect of disbursements. The first set of charts summarise the overall bank position of the firms, including any amounts on office deposit. The average bank balance of the participant firms was 12,000, down from 29,000 two years ago and 48,000 two years before that: Financial Benchmarking Survey of Solicitors Firms in Ireland 2015/16 13

17 A firm is funded through a combination of bank and partner funding and the chart below indicates median capital per partner of 65,000: Clearly it is important that partners do not overdraw and have to be especially careful of any element of their profits that are due to changes in work in progress. Drawings need to be in line with cash profits. Financial Benchmarking Survey of Solicitors Firms in Ireland 2015/16 14

18 This year we once again asked firms for details of their overdraft facility and the chart below indicates how much unused facility they had. This is once again down compared to two years ago: Financial Benchmarking Survey of Solicitors Firms in Ireland 2015/16 15

19 The chart below summarises total lock up per fee earner - the amount owed by clients in respect of fees, disbursements and work in progress: The final chart shows debtor days: Financial Benchmarking Survey of Solicitors Firms in Ireland 2015/16 16

20 8 Cost per hour This final section looks at cost per hour, an important area as more firms are required to submit tenders and as prices become ever more competitive. The chart shows an estimate of the median cost per hour. This: Is an average across all fee earners; Assumes that equity partners bill 1,000 hours of work a year; that consultants and apprentices bill 800 hours a year, and that all other fee earners bill 1,200 hours a year; Makes allowance for interest on partner capital at a rate of 6% a year ie, to reflect a cost to the practice of using partner as opposed to bank capital; Includes the notional equity partner salary but no allowance for profit over and above that in other words this is the cost of fee earner time not the charge out rate you might assume in a tender. Financial Benchmarking Survey of Solicitors Firms in Ireland 2015/16 17

21 9 Conclusion This year s survey indicates better results, however for most firms life is still pretty tough. In particular many partners have still not cleared personal liabilities that arose during the recession, especially tax, so many firms are vulnerable to a further slowdown. Also, many of the participants are once again becoming exposed to property is likely to be tricky especially as the UK commences Brexit negotiations. Ironically many UK businesses are currently doing well, especially due to the fall in value of Sterling, which has boosted exports. Unfortunately the movement in Sterling has had the opposite effect on many Irish companies, especially agriculture, for whom the UK is an important export market. Some parts of the Irish economy may therefore start to slow down over the coming months. The new Legal Services Act may well mark the start of longer-term change in the legal market. The initial measures are very limited, and the introduction of LLPs is unlikely to have a significant impact. In the UK most law firms are now LLPs, and there are benefits however the reduction in personal risk can be overstated as the main risk for many firms is their bank, and banks invariably require personal guarantees when a firm converts. The bigger change is external ownership, something that is not on the agenda at present, but may be in the future. So, the key is to plan for the future, to be alert to opportunities, and to be pro-active. Also to build the financial strength of your firm so it is less vulnerable to shocks. That requires good management. That requires time! Financial Benchmarking Survey of Solicitors Firms in Ireland 2015/16 18