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Law firms remain profitable, says survey

06 December 2016

A survey of 41 New Zealand law firms has shown that their operating profit margins averaged nearly 38% in 2016.

The survey, carried out by Crowe Horwath and the Australasian Legal Practice Management Association, found the respondents expected revenue growth in their practices in 2017 of around 5%.

New Zealand has 932 firms with more than a single lawyer. The survey responses were received from across New Zealand, with 59% of responding firms in the North Island and 41% in the South Island. Crowe Horwath says it is satisfied with the adequacy of the sample size.

The survey benchmarked financial performance of the first utilising self-reported financial results for the respondents' 2015/16 financial year.

The results show that across the survey, operating profit before interest and taxes averaged $369,000 per equity partner, which was considerably higher compared with 2015. The ten best performers had an average operating profit of $659,000 per partner and a median operating profit of $596,000 per partner.

Non-equity partner salaries averaged $171,000, which was 12% lower than 2015. The average revenue generated per fee earner was $368,206 - up slightly on the 2015 average of $351,622.

The survey report says gross profit margins were impressive at an average of 78.7%: "The average firm in our survey reports equally impressive operating profit margins (EBIT margins) of 38%. EBIT margins have increased for firms at all turnover levels from 2015."

The most recent information from Statistics New Zealand shows that the whole legal services industry had a before-tax gross profit margin of 34.9% in the 2015 financial year.

The survey results show that rent was the largest "other" operating expenditure for the respondent firms, at 6.9% of revenue on average - although this varied between participants at 4% to 14% of total revenue. IT and telecoms made up an average 1.57% of operating expenditures, followed by marketing and business development (1.19%). 

The results show that 76% of responding firms billed their clients using an hourly rate - up from 69% in the previous survey.

Risks and Threats

When considering risks and threats, the largest threat to success was macro-economic factors, with 41% of firms pointing to this.

Risk or ThreatProportion
Macro-economic factors41%
Staff access/health/retain22%
Drop-off in conveyancing13%
Poor utilisation13%
Other6%
Competitors3%
Technology3%

Key focus areas

Responding firms were asked to identify the "one key" focus area which needs to fall into place to ensure their financial future. Better utlisation was identified by 29% of firms as their key focus area moving forward. This was followed by better volume (21%) and marketing/technology (18%).

Last updated on the 16th September 2019