Profitability at UK law firms jumped to a seven-year high last year, driven by robust fee income growth coupled with tight control of overheads. Net profits generated by equity partners rose by 8.5 per cent to an average of £135,979 in 2016, compared with £125,340 in 2015. Fee income increased by an average of 5.8 per cent, well above current inflation levels, meaning that firms are seeing strong growth in real terms. Corporate/commercial work, commercial and residential property, and probate and estates were among the practice areas seeing strongest growth.

Greater control on spending

At the same time, greater control over spending on major overheads such as office costs also contributed to the improvement in bottom line profits. Firms are looking to maximise efficient use of space that ranges from some law firms fitting more lawyers into the same floor space to more actively sublet excess space. The findings are published in the Law Society’s Law Management Section Financial Benchmarking Survey 2017, which was written and produced by accountancy firm Hazlewoods.Law firms surveyed say they have also managed to keep marketing costs and professional indemnity insurance stable, helping to offset higher staff costs as pay in the sector continues to rise.

Overheads

The median spend on non-salary overheads per fee earner was £36,865 in 2016, down from £38,730 in 2015. As a proportion of fee income, non-salary overheads dropped slightly, to 31.5 per cent last year from 32.3 per cent in 2015. After deducting a notional salary and interest on capital, equity partners generated a median “super profit” of £55,941 per partner last year – up 6.7 per cent from £52,436 in 2015.Overall profit margins hit 24.2 per cent last year compared to 22.8 per cent the previous year.

Strong year

Andy Harris, associate partner at Hazlewoods, says: 'This has been a strong year for many law firms following a run of profit growth, highlighting the strength of the UK’s world-leading legal profession. Law firms of all sizes are enjoying the fruits of sound financial management plus a resilient market for legal advice. While salaries may be rising, our findings suggest that most firms have a firm handle on their other big costs and are operating more efficiently to ensure benefit from the revenue increases they generate.'

Good financial management

Former President of the Law Society Robert Bourns, commented: 'The legal sector is an active and vibrant contributor to the UK economy. In 2015 it contributed £25.7 billion to the UK economy, £3.6 billion in net exports, with overall growth of eight per cent. Our Future of Legal Services report identifies the key drivers for change in the sector, together with the opportunities and potential challenges. Having good management helps firms financially, which will be important for them to remain sustainable in the face of increased competition.'

RBS report

The figures follow on the back of the RBS report which found that 2016 was a good year for law firms with the financial performance of SME sized legal firms growing by five per cent. RBS said that the combined average growth rate over the last two years at 11 per cent was very positive when compared to many other industries. RBS reported that revenue growth by volume has facilitated an improvement in profit for the owners of legal firms and in 2016 the average profit per equity partner (PEP) was £120,000. Year on year, PEP has improved with the  2016 performance 33 per cent up from 2013.