Law firm profit divide continues to widen

Revenue has fallen at a quarter of firms over the last year, and the gap in both profitability and growth in turnover between London and the rest of the UK continued to widen. In most firms headcount has remained static or fallen.

These are the findings of accountant Crowe Clark Whitehill’s annual client benchmarking survey, released today. Overall, 70% of firms recorded growth in turnover, a figure that rose to 80% in London. Net profit in London firms averaged 40%, compared with an average of 36% in other major cities, and 26% for other regional locations.

Louis Baker, partner at Crowe Clark Whitehill, told the Gazette: ‘The divide between London and other cities, while not a surprise, causes tensions within some firms with offices in both.’ For regional firms looking to open a London office, the ever-widening gap would present a particular challenge.

He added: ‘But it is the regional firms outside the cities that are struggling the most.’

While the link between positive results and location was clear, there was no such link between practice size and its ability to grow, Baker said.

Firms have failed to make progress in cutting the number of lock-up days with the number increasing for some firms: 40% of firms had a lock-up average in excess of 150 days - up from 33% last year. ‘This was the biggest surprise in this year’s findings,’ Baker noted. Bank finance continues to be ‘difficult’ for firms to obtain, and economic growth is poor, he explained: ‘So we expected firms to have responded to that pressure by bringing lock-up days down.’

For 62% of firms, staffing levels were frozen or cut. Among partnerships, 42% saw no change in numbers, and 27% reduced partner headcount. For firms whose turnover grew, there was no proportionate growth in staff or partner headcount. Consistent with 2011’s findings, the average professional indemnity premium as a proportion of turnover was 1.63% for the largest 50% of firms and 3.67% for the rest.

Detailed financial data was provided by 50 firms with turnovers between £1m and £200m. Half had a head office in central London.