20th Annual Law Firms’ Survey 2011 - Transcript

David Snell

Well it is interesting, I am looking at our 2011 survey, at first sight it looks like it has been a really uneventful year so fees, profits per equity partner and chargeable hours all look broadly flat, but when you get to do some more detailed analysis some really interesting things emerge so we have talked in the past about the difference in profitability between the biggest firms, the top 10 and the rest and that has been clear for a while but this year what we are seeing actually is big disparities in performance even amongst the top ten firms so if you look at profit per equity partner, the best performing firms are achieving profits per equity partner in excess of £1.3M whereas the lowest performing firms are down at £500,000 - £530,000 per equity partner so really big differences. 

Some very clear challenges that emerge from the survey and I will just deal with a couple of them internally.  Firstly pricing, it is a hugely competitive market for UK law firms it is becoming increasingly competitive for them internationally as well, so there is real pressure on pricing.  There is real pressure on their profitability and their margins and again the biggest the firms seem to be holding their own, so if you look at their net profit margins they are holding them more or less broadly constant over the last three or four years, but outside of the top ten margins are dropping really significantly and I think that is a real consequence of the intense competition that we are seeing out there, and it is interesting if you then sort of look at the firms outside the top 50 they are the worse effected of all and their margins are something like 15% below where you see the top ten, and they are the ones most likely to be affected by the alternative business structures that are coming in where we will see new entrants coming into their market, perhaps new entrants backed by private equity so the outlook for them looks extremely challenging. 

Most firms have already looked very closely at their cost structures and the way they are structuring their businesses, their business models and some firms have begun to take action already.  Unfortunately whilst they have taken cost out of their business what they haven’t actually done is actually change the way they do business, so they haven’t changed their processes they haven’t simplified the way they do business and what has happened more recently in this year’s survey was seeing it come through is they cannot maintain their businesses and continue to operate them as they have so headcount is beginning to increase again.  So what firms actually really need to do is not just take out heads, but they need to simplify the way they do their business and look at different operating models.