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Smaller law firms outshining larger ‘show ponies’

2 December 2009


Smaller law firms outshining larger ‘show ponies’ in profitability stakes

Smaller Auckland legal firms are closing the income gap with their glossier ‘show pony’ Big 6 peers, according to the latest Auckland Legal Practitioners’ Performance Survey report released recently.

“Our survey this year has shown that smaller firms can do well with net income figures per equity partners stacking up quite favourably against the larger firms,” says Sam Bassett, Auckland director of Markhams Chartered Accountants and Business Advisors, which has conducted the survey for the past four years.

“In today’s uncertain environment where overheads can eat their heads off, the smaller three to four partner firms are finding that it’s safer to be smaller,” says Mr Bassett.

“While there is huge variance across the 21 respondents, some of the smaller firms are producing profit in excess of $500,000 per equity partner, and a number of these firms are definitely out-performing the large six legal firms in Auckland.”

Another trend identified in the report was the increase in the number of non-equity partners in firms. The average number for the top five performers in the survey rose from 1.6 in 2008 to 3.4 non-equity partners this year.

“Mid sized firms have recognised the success of this strategy in the large law firms over the past few years and have effectively adapted it to their situations,” Mr Bassett says.

“In nearly all cases, employing non-equity partners on a salary / bonus remuneration basis has led to higher profitability being achieved per equity partner. It also offers younger, keener lawyers a stepping stone to equity partnership by encouraging them to attract work and develop their own client bases.

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“It’s no longer enough to dangle the carrot of partnership; younger professionals need a nosebag to keep them committed to a particular firm. It has to be a win – win scenario, and this strategy is working well now for medium and smaller firms.”

Another facet covered in the report is the need for many firms to better manage their own businesses. Again, many of the small to mid-sized respondents revealed better control of overheads, work in progress (lock up) and debtors than their larger counterparts.

“Some respondents have definitely got the formula right and are running very efficiently, while others need to improve to remain viable,” Mr Bassett says.

The dramatic change in the general economic trading environment this year has been challenging and Markhams expects this to be reflected even more in the 2010 survey.

“Specialisation, particularly in property, mergers and acquisitions has been particularly heavily hit during the current 2009-10 year,” says Mr Bassett.

An initiative of a legal industry business development unit of the chartered accountancy group, the regular Markhams survey, conducted in the Auckland marketplace, covers topics such as practice profitability, efficiency, work type, hours, salary comparisons, and professional indemnity insurance.

The survey report is made available free to industry participants and copies can be sourced from Markhams Auckland office.


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