One third of fee revenue converted to profit, benchmarking says
The average law firm in a legal services benchmarking study converted around 33%-36% of fee revenue into profit and generated between $220,000 to $320,000 of profit per partner during the period over the 2014 and 2017 financial years.
The ANZ Legal Services Financial Benchmarking report analyses the performance of 75 legal services firms across New Zealand. It notes that the results for the 2017 financial year are based on a smaller sample size of 37, with these tending to be larger firms.
The median revenue of the firms in the study was $3 million and the median number of partners was four. The majority of firms operated using a partner model, with the balance made up of incorporated firms and sole practitioners.
The report says just over 50% of the firms in the study withdrew all of the profit and at least three quarters withdrew more than 80% each year.
"The legal services sector has experienced strong growth over the last four years with elevated activity in property, construction, strong net migration and improved business confidence," it says.
"There is evidence to suggest that firm size and profit per partner are positively related, and possibly causal. However, there is no correlation between firm size and profit margin."
At a regional level, Auckland CBD firms averaged around $100,000 to $140,000 more profit per partner per year than the rest of the country. While noting that many Auckland-based firms also have offices in other main centres, this is still seen as a materially higher result.
Median revenue per partner grew from $672,000 in the 2014 financial year to $924,000 in 2017, although the study acknowledges that the smaller sample size in 2017 is dominated by larger firms who have tended to produce higher than average revenue per partner results.
"While staff costs grew marginally over the analysis period the median result for total operating expenses to total revenue was steady around 61% to 63%. However, we noted a large disparity between the upper and lower quartiles for this metric, which has a material impact upon firm profitability."
The report says staffing is a key issue, but the challenge is not unique to the legal sector as human resource shortages are currently present across the whole New Zealand economy.
"Our analysis highlights that staff costs have been rising faster than revenue with the median wages and salaries to total revenue ratio increasing by 2.5% over the four year benchmark period."
Debtors and receivables
The report says receivables create a large portion of the sector's overall capital requirement. As such, improvements in debtor collection will generally improve returns, "assuming all else remains the same".
On average, firms in the study took around 50 to 55 days to collect receivables.
"However, there is a wide range on this metric and this variance is driven by multiple factors such as a firm's investment in their accounts function and the type of clientele the firm services. Firms with larger blue chip clients may tend to have upwards pressure on debtor days as these clients often operate on longer payment terms."
Mid-size law firms in the study have indicated optimism for the next 12 months, but less so for the next three years.
"This longer term sentiment could be influenced by themes such as a cooling housing market, expectations of higher interest rates and the general level of global uncertainty going forward. Tourism, construction, real estate, agriculture and healthcare have been highlighted by law firms as sectors which are most likely to fuel growth in the near term."
Last updated on the 16th September 2019