Review of Paragon

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The Centre for Interfirm Comparison

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Not-so-fat cats
Twenty years of benchmarking for solicitors


Solicitors firms operate on lower profit margins today than they did twenty years ago and the typical profit per partner has only increased at the same rate as national average earnings according to analysis by the Centre for Interfirm Comparison.

Other key findings were:

  • Mix of work has changed considerably. Conveyancing used to provide almost half of provincial firm's income; now one quarter. Family, employment and personal injury work have expanded.
  • Support staff numbers have been cut. The proportions of word processing staff have fallen from 43% to 34%.
  • Higher staff costs - employed solicitors in particular - are responsible for lower margins.
  • Chargeable hours have not increased.
  • Charge out rates have increased in line with average earnings.

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    In Detail:

    This year the Centre will run the twentieth Paragon, interfirm comparison for solicitors. Below are some findings from our examination of nearly 20 years of benchmarking solicitors performances.

    In 1985 when CIFC launched Paragon with the support of the then LOMAT (Law Office Management and Technology) Committee of the Law Society the average profit per partner of a provincial firm was 33,500 and that of a central London firm was 73,100. In 2003, the corresponding figures were 114,000 and 187,000, increases of 3.4 times and 2.6 times respectively. In the meantime of course the retail price index has doubled but nonetheless the increases still represent a worthwhile increase in spending power. However the index of average earnings has increased 2.9 times which puts the rise in partners earnings overall squarely in line with average earnings rises over the period.

    Profit margins have narrowed in the period while firms' increased revenues have helped to compensate. In the early years of the comparison, profit margins of 20% were the norm for both London and provincial firms; for the past 3 years around 14% has been typical.

    Revenue per partner has risen sharply as the following table shows:-

    Revenue per Partner

    London

    Provincial

    1985

    238,000

    109,000

    2003

    850,000

    474,000

    Increase

    3.57 times

    4.35 times

    Price increases are one reason for the rise. Charge out rates per hour for a partner are now 250 in central London and 150 elsewhere, roughly 3 times their 1985 values again closely in line with average earnings. The other reason is the higher gearing of firms today, that is the number of staff per partner, which has steadily increased from 7.0 to 9.0, with many firms - often the most profitable firms - having a much higher gearing.

    What has not changed is the number of hours charged to clients. Despite what one hears of the pressures to bill more hours, the average has hardly changed at all. In London the figure of 1100 hours p.a. for partners and assistant solicitors is identical to that when we started the studies; provincial results were very similar. Of course the figures for the very large commercial firms may be much higher; our figures reflect the results of medium sized firms throughout the country.

    If margins have narrowed, costs must have increased and staff costs have increased most. In 1985, overhead costs (all costs other than staff) averaged 31.8% of revenue, most recently they were barely changed at 32.2% but staff costs have increased from 49% to 54%. More money is being spent on fee earners and less on support staff. In particular, the proportion of typists has fallen from 43% of all staff in 1985 to 34% last year.

    Winners in the salary league are employed solicitors (salaried partners and assistant solicitors) especially in London where the typical salary rose 3.8 times as the following table shows:-

    1985

    2003

    Increase
    (times)

    Profit - Equity partner London

    73,000

    187,000

    2.5

    Profit - Equity partner provincial

    33,350

    114,000

    3.4

    Salary - employed solicitors London

    16,500

    62,400

    3.8

    Salary - employed solicitors provincial

    11,700

    37,200

    3.2

    Salary - legal executives London

    14,050

    44,900

    3.2

    Salary - legal executives provincial

    9,300

    24,000

    2.6

    Salary - typists/w.p. staff London

    9,450

    30,800

    3.3

    Salary - typists/w.p. staff provincial

    5,100

    15,200

    3.0

    The mix of work is one area which has changed considerably - for provincial firms in particular. In the first year, conveyancing provided 46% of revenue for provincial firms but that had halved by 1994; most recently it was 24%. Many provincial firms today have a much wider portfolio of work with the expansion of family, employment and personal injury work. Whilst some of the larger provincial/metropolitan firms have made inroads into London's dominance of commercial work, the proportion has not changed for the average firm, accounting for 10% of revenue then and now (see pie chart).

    Provincial Firms - Sources of Revenue

     
     
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