De-equitisation driving profitability

21 November 2011

MEDIA RELEASE

De-equitisation driving profitability

The continuing trend of de-equitisation within legal firms is driving growth and maintaining partner incomes according to the latest Auckland Legal Practitioners’ Performance Survey report released today.

De-equitisation began in the early 2000s, driven by larger firms to enable equity partners to maintain income. De-equitisation involves reducing numbers of equity partners within the firm and the appointment of more non-equity and senior partners.

“We are seeing the tendency to de-equitise, originally driven by large legal firms, now confirmed within mid-size and smaller firms, and the trend appears to be increasing each year.

”Where once a firm employing 40 to 50 staff would have around 12 equity partners, it is now more likely to only have around six equity partners,” says Sam Bassett, Auckland director of Markhams Chartered Accountants and Business Advisors, which has conducted the survey for the past six years.

NZ Law Society statistics confirm that the number of lawyers who are principals is reducing.

“Becoming an equity partner is harder to achieve now, it’s not necessarily the natural progression it once was. Societal change is also partly responsible for the shift with some younger lawyers preferring salaried positions without the headache of running their own firms. Becoming an equity partner is not the attraction it once was,” says Mr Bassett.

Succession is a huge issue looming for older practitioners (65 years and older). According to the NZ Law Society, there are nearly 1000 lawyers who were admitted to the Bar in 1977 or earlier and who still hold current public practicing certificates. This indicates there is a tidal wave of departures looming as a significant number of these lawyers are sole practitioners.

One option is for these sole practitioners to sell to mid-size firms, says Mr Bassett.

“This can be beneficial for retiring sole practitioners. Rationalisation of overheads and more efficient systems can create a positive succession plan for both parties; the retiring lawyer can earn more income in their last years of practice, and the firm taking over the fees benefits from an increased fee income covering existing overheads,” he explains.

Another of the Survey’s key findings is that despite the recession, fee income has not been adversely affected, with the top five firms in the Survey reporting an average fee income of $1.4million compared to $1.3million per equity partner in the previous year.

In the 2010 Survey, participants reported the recession had impacted negatively on their income levels. However participants in this year’s Survey are reporting turnover has either increased or been maintained and net income per equity partner has increased, due to tighter controls over staff salaries and overhead expenses.

The report highlights characteristics of a profitable legal firm, recommending the ratio of overheads (excluding interest and salaries) to gross fees of under 30 percent.

“Staff salaries to gross fees should generally be 30 to 35 percent, variable if gross fees are significantly higher. A staff to partner ratio of 5+:1 is desirable, however with specialisation this ratio can be lower. The ideal hourly charge-out rate is $400 plus an hour,” advises Mr Bassett.

“Astute financial management and reducing lock-up of work in progress and debtors to less than three months, is critical to smooth cashflow.

“As with last year’s results, we are aware that some of the mid-size firms are performing better than their larger counterparts. But anecdotally, we know that other mid-size firms are struggling – it is tough out there but those who have been able to maintain net incomes are doing well.”

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.

ENDS

© Scoop Media