Cost saving pays off as study reveals profit growth

Australian law firms are beginning to reap the benefits of a considered approach to cost savings, a recent survey reveals.

Australian law firms are beginning to reap the benefits of a considered approach to cost savings, a recent survey reveals.

According to the ALPMA/Crowe Horwarth Financial Performance Benchmarking Study of Australian Law Firms, profits increased to 15.1% in 2014, compared with 10.1% in 2013.  The study found that gross profitability was up to 58.2% in 2014 compared with 55.5% in 2013.

Despite this increase in profit, the report found that profit per partner was down in 2014.  ALPMA president Andrew Barnes said that an increasing trend to promote more partners in order to avoid lawyers changing firms was one reason for the drop.

“If you’ve got a partnership with five partners, and five million dollars in fees, and they introduce a sixth partner without growing their fees, then the revenue per partner will drop,” he said.  “People were taking on lateral hires at faster rates than we have before, promoting from within to stave off the threat of them going to another firm – you can expect that there will be an increase in partnership numbers without the corresponding increase or proportional increase in fees.”

The report also noted that firm profitability is still reliant on cost saving rather than revenue growth and that there is still some way to go before firms attain greater certainty regarding their financial positions.

The study also indicated that firms have found lateral recruitment of fee earners to be particularly challenging, but viewed it as an essential strategy to increase revenue.  Meanwhile, recruitment of less experienced lawyers has slowed. 

Barnes also observed that firms are improving cash flow and beginning to spend more on technology and other areas that they believe will facilitate growth over the coming year.

“Firms have been through a fairly lengthy period of cost control, cost management and not spending too freely outside of the items they need to spend on.  That’s been able to preserve a profitability level in an environment where it’s been very tough to grow revenue,” he said.  “Banks are lending more so firms are on the verge I think of reinvesting in their firms whether it be by technology or the things that they have cut back on over the years.”

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