Falling income and profits hit small and mid-sized firms hardest

Firms of all sizes, but particularly those in the small to mid-sized range, must adapt to a climate of falling income and profits after the end of a three-year period of growth, according to a new report.

A study of 113 firms by MHA, a national group of accountancy and advisory practices, reveals that law firms from single-partner firms to those with over 25 partners saw their income fall in 2017.

Mid-sized firms, classed as those with 11-25 partners, experienced the biggest drop of 11%. Both sole-practitioners and larger firms had smaller decreases of 1-5%.

Nonetheless, even decreases in income of only a few percent can hit smaller firms’ profitability hard. Single-partner firms’ profits have fallen by an average of 60% since 2015, as smaller practices struggle in a market dominated by larger firms. Profits per equity partner at mid-sized and larger firms also fell by 11% and 8%, respectively.

The research also revealed how firms are adapting their structures to cope with squeezed profits. Firms are employing higher numbers of paralegals and support staff, and have fewer senior fee earners, as they look to cut costs by paying their employees less for the work they do.

Karen Hain, head of the professional practices sector at MHA, said: “2017 was a year of change for the legal sector and our research paints a challenging picture for many firms. A combination of factors, including fewer mergers and acquisitions, the impact of the fixed fee regime, increased competition from more cost effective and price-driven business models, succession planning issues and the inevitable political and economic uncertainty have created a shift in the operating environment for firms of all sizes.”

She continued: “The UK legal sector needs to adapt to a ‘new normal’ putting a direct emphasis on having a better understanding of profitability and margins on work undertaken and improved financial controls. Efficiency needs to be a key theme for 2018 and beyond.”