Legal firms are experiencing increasing pressure on fees and profit according to a recent survey.
The survey found a range of factors contributed to the current situation including:
- Global market conditions
- Growing professional indemnity costs
- Increasing regulations
- Increased technology spend
- Growing cybersecurity risks
Fortunately, flat wage growth across Australia in recent years has provided relief to pressure on profit. However, an excess of graduate lawyers in the market raises the question of whether oversupply has kept wage growth down and therefore hidden declining performance. Further, if wage growth begins to increase, particularly with recent media scrutiny of the workload amongst graduate and junior lawyers, this will likely bring bottom line pressure to the fore again.
Amongst respondents, 75% prepared an annual budget and tracked against it. To improve profitability, firms need to continually be measuring their performance against their annual budget to proactively identify potential factors that will reduce margins or capitalisation opportunities to increase profitability. Based on the survey responses, the average net profit as a percentage of professional fees in 2019 was 34%, and in 2020 it was forecast at 33%.
In last year’s survey, the average write-off rate as a percentage of fees was 10%. The write-off rate as a percentage of fees for FY19 is as below.
With almost 1 in 2 firms having write off rates lower than 5%, this indicates that firms are managing WIP and costing of work appears accurate. Respondents exceeding write-off rates of 10% should closely review and consider if their current practices remain appropriate.
Another positive for firms’ finances was a large increase in the number of firms that tracked billable hours. In last year’s survey, 63% of respondents tracked billable hours, and this year 87% tracked billable hours. Poor utilisation is a significant cost and it is pleasing to see firms are continuing to track hours even as billing models and methodologies are changing.
As a partner of a professional practice, asset protection, income distribution flexibility, and a platform for wealth creation should be your key goals. According to the survey results, 87% of respondents said they felt their assets are adequately protected, while 72% said they have a personal wealth accumulation strategy.
A key factor that continues to cause personal financial uncertainty amongst law firms in Australia is the Australian Taxation Office’s professional income splitting rules. These guidelines remain under review at the time of this report.
Amongst the respondents, female partners (75%) and non-equity partners (67%) weren’t as satisfied with their remuneration as their male (82%) counterparts. This provides firms with a potential avenue for improving staff retention and succession strategies. Firms should look to engage with female equity and non-equity partners to open a dialogue around remuneration with retention and firm succession in mind.
Personal wealth accumulation was low particularly with females and non-equity partners. As these are the partners most likely to change firms, perhaps firms should consider offering support with personal wealth and asset protection as a retention and even talent attraction strategy?
Equity and non-equity partners
- 75% of equity partners likely to have a personal wealth accumulation strategy
- 91% of equity partners likely to feel that their assets are protected
- 50% of non-equity partners likely to have a personal wealth accumulation strategy
- 58% of non-equity partners likely to feel that their assets are protected
- 81% of respondents are satisfied with their renumeration
- 72% of respondents have a personal wealth accumulation strategy
- 59% time based
- 31% fixed price
- 8% value based
- 2% other
This article was published in Pitcher Partners’ 2020 Legal Survey.