Lawyers cut costs to maximise profits as firms face pressure

PROFITS at Scotland’s law firms have risen for the first time since the financial crisis – but the headline figure masks tough times for the smallest and largest practices.

Average profit per equity partner across all sizes of firm rose to £71,000 in 2011 from £64,000 in 2010. Yet the figure still lags far behind the dizzy heights of 2008, when profits reached £104,000.

Medium-sized firms, with between five and nine partners, posted the strongest growth, while sole practitioners and practices with between two and four partners continued to suffer.

Part of the increase in average profits could be due to firms axing partners, a trend highlighted in two recent surveys of the wider UK legal sector.

Lorna Jack, chief executive of the Law Society of Scotland, which compiled the latest figures, blamed a fall in Legal Aid work for the drop in smaller firms’ profits, as well as a trend for clients wanting “more for less”.

Jack said: “The survey shows that there are still very mixed fortunes among our membership and, while it is heartening to see that overall, there has been a slight upward swing, it is apparent that smaller law firms continue to be hardest hit by the downturn.

“The report’s authors predict that the economic conditions will continue to prove difficult for solicitors throughout 2012. The legal services sector will remain highly competitive with clients continually pushing to get more for less, particularly in the current economic climate.”

News of the continuing struggle for some players could spark further mergers and acquisitions (M&A) within the sector.

Last week, McGrigors – Scotland’s biggest law firm by turnover – revealed that its partners had voted in favour of a merger with its larger London-based rival Pinsent Masons.

Among the mid-tier players north of the Border, Edinburgh-based Tods Murray last month swallowed up two-partner private client specialist Fyfe Ireland.

Charles Barnett, a partner at accountancy firm PKF, said: “People shouldn’t expect profits to return to 2007-8 levels – those were boom years, as shown by the market correction we’ve seen. A lot of lawyers rely on transaction work and, with the banks lending at lower levels, we’re not seeing the same number of transactions. I know that there are a lot of law firms – with, say, ten or 15 partners – who are actively talking about mergers.”

Mike McCusker, a partner at accountancy firm PwC in Scotland, added: “These are still good profit figures compared with what the average person earns in the Scottish economy. Everybody is having to work harder to get profits back to pre-2008 levels.

“I think a lot of the trends we’re seeing at the biggest UK law firms will be true for smaller firms and sole practitioners too. Everybody is looking at where they can cut costs and which areas are the most profitable.”

Sole practitioners’ profits fell to £46,000 from £49,000, while larger firms with ten or more partners reported a drop to £144,000 from £178,000, although the Law Society of Scotland warned those figures came from a small number of respondents. In total, 238 firms replied to the “Cost of Time” survey, the largest study of its kind in the UK, the society claimed.