By Andrew Barnes, ALPMA President & Financial Controller, The Lantern Legal Group
ALPMA and Crowe Howarth recently released the results summary of our annual Financial Performance Benchmarking Study of Australian Law Firms – and I wanted to share with you my thoughts on the key findings, summarised in the infographic at the end of this post.
1. Firm profitability continues to rise thanks to strong cost control
While average revenue per partner fell by nearly 6% for most firms in 2014, the successful pursuit of leaner operations significantly increased gross profitability.
According to the study, the average profitability of law firms increased to 15% in 2014 compared to 10% in 2013, while gross profitability is up to 58%, compared to 55% in 2013.
Unlike previous years, when firms looked inwards and concentrated on cost cutting right across the board, firms are becoming more targeted in their cost reduction strategies. Average overhead costs (excluding rent) reduced to 36% as a percentage of revenue, compared to 40% in 2013. Average lock-up days (time taken to complete matters, invoice and collect fees from the client) reduced from 147 days last to 141 days. This indicates an improvement in internal processes for collecting cash and is a positive for firms’ cash flow.
The study’s Financial Resilience Index, which measures how efficient the generation of revenue is from the capital employed by the firm, also increased to 2.69, compared to 2.23 last year, showing an increase in financial resilience of more than 20%.
2. Growth is firmly on the agenda
Firms are starting to shift their focus from cost savings to revenue growth – there’s really only so far you can cut costs before you start hitting bone.
Growth firmly on the agenda, with firms that participated in this year’s study intending to increase revenue in 2015 by an average of 10%, with larger firms indicating growth over 20%.
3. Investment in business development and lateral hires
Australian law firms are starting to shift their focus from cost savings to revenue growth – as there’s really only so far you can cut costs before you start hitting bone.
They are opening their purse strings to invest in areas of business they believe will facilitate growth
Firms are planning a greater investment in marketing and business development activities and focusing on lateral recruitment in order to be competitive moving forward.
4. Firms transitioning from the billable hour
For the first time this year, the survey also sought to measure the basis of client billing amongst respondent firms, with the majority of firms' revenue (70%) still use the billable hour as their predominant billing measure.
What is noteworthy is that 30% of respondents advised that they use a method other than billable hours, such as fixed or value pricing. I expect this number will increase over time as clients continue to demand value from their legal spend and firms either reinvent the way they practice or mimic the way their competitors do.
5. Execution of strategies is key to success
Firms who succeed will be those who can execute their strategies, maintain a lean cost base and, importantly, retain key staff.
Has your firm been building its business development and marketing capability and managing staff engagement over the last 18 months or so?
If so, you will be well-positioned to manage in what is shaping up to be a very competitive market in 2015.
Readers interested in learning more about the overall results of the study can download the ALPMA/Crowe Horwath Financial Performance Benchmarking Report Summary.
About our Guest Blogger
Andrew Barnes is the President of the Australasian Legal Practice Management Association (ALPMA) and the Financial Controller of the Lantern Legal Group, which incorporates the practices of Harwood Andrews and Sladen Legal.
He has worked in the legal sector for many years and is a passionate advocate of 'letting law firm managers manage' and the Geelong Football Club.