NatWest recently published its annual 2015 Financial Benchmarking Report for law firms, which details what NatWest observes as “a remarkable improvement in the health of the legal market.”
I’ve just returned from a holiday, during which I finally had time to sit down, read and digest the report – and it has some interesting recommendations for law firms on how to make the most of the upturn and remain sustainable.
NatWest’s annual law firm benchmarking report has always offered expert insight, based on detailed analysis of robust primary data. This year is no different. This is the third survey that NatWest have conducted, tracking the financial data of small-to-medium-sized law firms in 2014. This year’s report analyses data gathered from 339 firms across the country.
Key financial predictions for 2015 include:
- 81% believe that fees per fee earner will increase
- 66% believe that their bank balance will improve
- 68% believe that chargeable hours will increase.
This optimism in growth is to be celebrated, and those working in the legal sector should certainly feel positive about the economic recovery and the opportunities it presents. But it is also important to understand the detail of where growth is coming from and carefully monitor operational and financial data from law firms to ensure growth is sustainable and increased revenue also leads on to increased profits.
Steve Arundale NatWest’s Head of Commercial Professional Sectors, highlights these challenges in the report’s foreword when he says, “this year’s report details a healthy improvement in both revenue and profit levels, but improvement in profit margin appears to be a harder nut to crack. He goes on to dig a little deeper into the data:
- Operational efficiency still appears to be a challenge – only 40% of firms believe their profit margin will remain unchanged or will decrease
- Given that only 43% anticipate improved work in progress (WIP) days and 44% anticipate improved debtor days, many firms could face cash flow challenges associated with lock-up, despite increasing levels of work
“In order to preserve financial stability, legal firms must stay in touch with their cash position, and cash budgeting is more important than profit budgeting.”
As the infographic below shows, 81% of firms believe that fees per fee earner will increase in 2015 but fee income is growing faster than fees per fee earner, as additional recruitment has driven some of the increased revenue.
As firms hire more lawyers, it is important that they are able to track fee earner performance. The report shows that only 36% of firms claim to have detailed time-recording policies (this goes down to 20% for small firms), so a lot of time goes unrecorded.
As firms get larger, they find it increasingly difficult to manage lock-up: median lock-up for small firms is 91 days; for large firms, it is 125 days; and for very large firms, it reaches 132 days.
So the ability of fee earners to effectively monitor and track the time they spend on each client is crucial, as is their ability to quickly identify the client projects where lock up could pose a risk to future cash flow – and know how best to move them along.
As the above infographic shows, there is a belief that a reduction in debtor and work in progress days will improve cash flow in 2015. But to enable this, law firms need a responsive management information system that allows them to quickly identify debtors and focus on WIP days to drive work forward and quickly follow up on any lags.
The report suggests “Given that there has only been a small increase in fees per fee earner, this suggests that the majority of the rise has been generated by an increase in gearing. … However, there is likely to be a greater impact on profitability if the additional fees were dealt with by the existing fee earners by focusing more on the productivity of existing fee earners.”
The report also points out that in the past, many law firms’s profits have relied on bank interest from holding client money. But as the last few years have seen significant falls in transactional work, law firms now hold much less client money. Coupled with a drop in interest rates, this has also meant that many firms have had to look again at how they make money from legal services, and to become less reliant on the interest earned on client accounts.
Operational efficiencies and fee earner productivity have become much more important in determining a firm’s profitability. Those firms that recognise this and put in place adequate monitoring systems to help drive efficiency and productivity will be the ones that survive and thrive in future.
To discuss how your law firm management information system could better support an operational efficiency drive, or give fee earners quick access to the information they need to increase their productivity, contact us by email or call 03333 010 766
Blog post by Graham Moore, Managing Director, Katchr