Profitability at small and medium-sized law firms is rising, but more slowly than the increase in the salary costs of non-partner fee-earners, research has revealed.

The fourth annual financial benchmarking survey conducted by the Law Society's Law Management Section and accountants BDO Stoy Hayward found that firms saw their average profits per partner rise 7% to 101,028 in 2003.

The cost of employment of non-partner fee-earners rose by 10.6%.

At the same time, firms are reducing the number of support staff.

The average for the 175 section members surveyed fell for the second year running to 1.17 per fee earner.

A third of firms are operating without a practice manager.

BDO partner Nick Carter-Pegg said: 'Firms that ignore the role of practice managers do so at their peril.

They are soaking up valuable fee-earning time while tackling the operational side of the business, and often don't have the right skills.'

The survey also found that firms with two to four partners are better at managing their cash flow, taking on average 41 days to collect fees from clients, compared with 56 days for larger firms.

Median fee income per partner grew by 9.4%, reflecting an increase in the number of fee-earners per partner.

Most firms (80%) have addressed the issue of whether to convert to limited liability partnerships, but only 3% have done so.

The research also uncovered growing interest in the Lexcel quality standard - 29% have reached it and a further 29% hope to achieve it in the next year.

Julia Balfour-Lynn, chairwoman of the section, said: 'Increasing regulation and market pressures are inevitably leading successful firms to adopt more sophisticated methods of managing their practices, with many more firms achieving Lexcel accreditation.'