Law firms enjoy third successive year of growth

While large firms continue to dominate the market, the fortunes of small firms are less rosy as income and profit levels reduce and their cost base increases. However, overall, firms with five or more partners have experienced significant income growth rates of between eight per cent and 20 per cent, fuelled by mergers, the volumes of corporate transactions and the improving economic conditions, according to the latest annual Legal Benchmarking Report from MHA the UK-wide group of accountancy and business advisory firms. As a result, the gap in growth rates of the largest firms  of more than 25 partners compared to those of mid-tier firms  with 11-25 partners continued to widen in 2016 with large firms now nearly three times the size of their mid-tier competitors. The trend for mergers in mid-tier and large firms accelerated during 2016, and is expected to continue through 2017.

Increases in net profits

Most firms saw increases in net profits of between two per cent to five per cent - their highest levels in the last three years. While large firms saw a four per cent increase fuelled, in the main, by a 20 per cent increase in fee growth in the year and greater control on expenditure and overhead reductions, those with between two and ten partners achieved an increase of five per cent, reflecting decreases in non-salary overheads and fee income increases. In marked contrast, sole practitioners showed a four per cent decrease in net profit. However, firms with four or less partners saw a reduction in income in 2016 down two per cent reversing a trend of low levels of growth in the preceding two years of between five per cent and eight per cent.

Larger firms sees increase in income

In 2016, the average income per equity partner in larger firms jumped to nearly £1.4million, from around £750,000 in the previous two years. The performance for those firms with 11-25 partners saw a reduction of 12 per cent compared to 2015. Firms with five to ten partners continued the trend from last year, with higher levels of average income compared to mid-tier firms, suggesting a drive for consolidation and increased efficiency in this group rather than adding new equity partners to drive growth. However, the performance at a profit per equity partner (PEP) level showed a decrease in the smaller firms.