South East: Law firms’ merger activity is thriving and lock up days are reducing, finds MHA survey

The latest annual legal practices benchmarking review from MHA, the UK-wide group of accountancy and business advisory firms, points to encouraging signs of growth as firms feel the benefit of the improving economy, most notably through an upturn in commercial and residential property work.

The review, undertaken by MHA’s professional practices group, indicates a much more positive outlook across most firm sizes, helping to ease the considerable financial pressures experienced in recent years.

This year’s results show how wider economic growth is driving up demand for legal services in commercial and residential property sectors, with confidence also returning to many practices active in corporate transactions.

Highlights of the report:
• Wage costs are still reducing as a percentage of fee income and turnover.
• Practice costs of rent, marketing, IT and professional indemnity insurance all saw an average reduction as a percentage of income.
• There has been significant growth in the average turnover for firms with 11-24 partners and 25+ partners.
• Lock up days have improved for all sizes of practice.
• Total fee income has increased for all sizes of practice, but this has not been reflected in profitability figures.

As the results from last year predicted, personal injury work-in-progress signed up before the Legal Aid, Sentencing and Punishment of Offenders Act 2012 (LASPO) is dwindling, meaning a reduction in income as a result of diminished success fees. Many firms have looked for new areas of litigation to replace the falling workload. Legally-aided funded practitioners are experiencing further cuts to income levels and are under continued fee pressure.

Overall the results are positive in relation to income, showing increases in total fees across all sized firms. There is significant percentage growth in fee income per equity partner, especially in the 25+ partner practices, where merger activity has generated growth, with strategic plans keeping the equity ownership group smaller.

Karen Hain, head of professional practices group at MHA, said: “Large practices have succeeded in making true economy of scale savings in overheads and running expenses, while still increasing top line fee income. We have also seen a reduction in equity partner numbers, so that these fewer individuals are really benefitting from higher rewards derived from personal capital invested in the business.

“We are seeing far more movement this year in smaller practice mergers, most of which is driven by succession planning issues.”

Profitability has not tracked the rise in fee income levels this year. However, results show expenditure on certain key overheads has reduced as a percentage of fee income. Expenditure on staffing remained fairly consistent, although this is expected to increase in 2015 as market forces take over and staff look for new opportunities at higher pay rates.

The survey shows that firms have taken the prompt to put the management of lock up – unbilled work in progress and unpaid fees - higher up their agenda and have made some significant improvements over the past 12 months as a result. Pressure from the banks will have been applied to reduce levels of funding, and so planning more control over working capital has been of benefit. There was a 15% reduction in lock up achieved by the 11-25 partner firms.

As Charlie Eve from MHA states: “The overall improvement in firms’ lock up is very encouraging and shows that faster work-in-progress billing and a greater urgency when collecting debts is starting to have an impact. More work needs to be done though, and a suggestion would be to target a 10-day lock up reduction for the coming year. The COFA’s, along with firms’ accountants, should be on hand to assist with techniques to make the target achievable.”

Commenting on the report, Hain concluded: "2014 was in many aspects a positive financial year for law firms and for individual partner profitability. There will be pressure on small firms to maintain income and profitability, but more crucially to improve their levels of lock up. 2015 is likely to be another year of consolidation in the sector, with further merger activity expected.”

To obtain a copy of the full survey, contact Hannah Farmborough, e-mail: Hannah.farmborough@mhllp.co.uk