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Special report: small law firms 2017 Legal Benchmarking Results macquarie.com/legal
Special report: small law firms
2017 Legal Benchmarking Results
macquarie.com/legal
This year’s benchmarking study is based on an in-depth survey of 275 law firms across Australia, commissioned by Macquarie and conducted by an independent third party research organisation who collated and analysed the data.
In this special report, we compare Clarence members with participants from other small firms with annual gross fee revenues of $1m or less.
ABOUT THE RESEARCH
B | Macquarie Business Banking
Key findings
Financial performance
People
Technology and operations
Outlook and future plans
CONTENTS
2
5
7
8
11
2017 Legal Benchmarking Results special report: Clarence members | 1
Other firms <$1m
Key findings
BENCHMARKING PERFORMANCE
SUCCESS THROUGH SPECIALISATION
The typical Clarence member in our survey was either a sole practitioner or incorporated practice, recently established and specialising in a few key practice areas — a proven formula for success, according to our research.
AVERAGE NUMBER OF PRACTICE AREAS OFFERED
Other firms <$1m
3.9
3.0
THE SURVEY PARTICIPANTS
LARGE
27 FIRMS
SMALLMID-SIZE
70 FIRMS
Gross fees over $20m+ $4 - $19.99m <$4m
165 FIRMS
Lower profit <17% <25% <26%
11 FIRMS
35 FIRMS
66 FIRMS
16 FIRMS
35 FIRMS
88 FIRMS
Higher profit 17%+ 26%+25%+
NUMBER OF FIRMS Other firms <$1m
6239
2 | Macquarie Business Banking
Other firms <$1m
Key findings
AGE OF FIRM
35%
8%
24%
11%
21%
41%
26%
13%10% 10%
Less than 3 years
4-5 years 6-10 years 11-20 years More than 20 years
FIRM STRUCTURE
56%
6%2% 2%
19%
11%
3%
51%
0% 0% 0%
46%
0%3%
Incorporated legal practice
Partnerships of individuals
Partnership of companies
Partnership of trusts
Sole practitioner
Trustee company
Other
TOP FIVE PRACTICE AREAS AND PERCENTAGE OF FIRMS THAT OFFER THEM
Other firms <$1m
1
2
3
4
5
Commercial law
67%Property law
49%Litigation/dispute resolution
41%Estates/wills
33%Family law
21%
Commercial law
63%Estates/wills
56%Property law
53%Litigation/dispute resolution
52%Family law
37%
2017 Legal Benchmarking Results special report: Clarence members | 3
Other firms <$1m
Key findings
Clarence members tended to be small, lean and highly efficient. Despite lower average fee earnings than other small firms, they achieved unusually healthy profits, with an average margin of 33.5%. Their success was made possible by exceptional productivity, a favourable cost structure, and strong financial management.
Yet our analysis also suggests Clarence members have unrealised opportunities to build on their success. With lower charge out rates than similar firms, they have used their efficiency to offer better value to clients, rather than taking advantage of the pricing power their specialised expertise may make possible. And while they are enthusiastic users of outsourcing, they are less likely than other firms to have adopted a range of productivity enhancing technologies, suggesting they may be missing opportunities for further efficiency gains.
CLARENCE MEMBERS OUTPERFORM, BUT HAVE UNREALISED OPPORTUNITIES
Other firms <$1m
Charge out rates• Commercial law• Property Law• Litigation/dispute resolution• Estates/wills• Family law
$420$382$421$404$425
$435$393$429$428$432
Average profit $119,643 $169,444
Average profit margin 33.5% 28.5%
Average headcount 2.7 5.4
Profit per staff member $44,312 $31,379
Combined salary and premises costs (as portion of expenses)
52% 60%
Debtor days 64% < 30 days 53% < 30 days
PERFORMANCE
4 | Macquarie Business Banking
Other firms <$1m
Financial performance
Eight in ten Clarence members had gross fee revenues under $500,000 in FY2017, earning most of their income from Commercial Law (an average of 25% of total revenue), Litigation (19%) and Property (15%). But while they tended to be small, most were highly profitable, with 72% reporting margins of at least 15% – and 29% achieving a margin of 35% plus.
Nonetheless, there are signs Clarence members could be doing more to drive further growth. 54% said their profits were the same in FY2017 as the year before, and average profit growth across the Clarence membership base lagged other firms by six percentage points.
FEES AND PROFIT: HIGHER PROFIT DRIVEN BY OPERATIONAL EFFICIENCY
GROSS FEES: CLARENCE MEMBERS
82%
13%
0% 3% 0% 3%
<$500k $500k - $1m $1m - $1.99m $2m - $3.99m $4m - $19.99m $20m and over
PROFIT PERFORMANCE IN FY2017
Average profit
$169,444
$119,643 33.5% 28.5%
Average profit margin
GROWTH IN FY2017
Revenue growth
14% 20%
Profit growth
13% 13%
2017 Legal Benchmarking Results special report: Clarence members | 5
Other firms <$1m
Financial performance
The benefits of the Clarence model were clear when we compared members’ expense profiles to similar firms. While Clarence members tended to spend a higher proportion of revenues on premises costs (18% versus 15%), the extra administrative support they received from Clarence underpinned significant savings on salaries (34% of revenues versus 45%), while allowing their staff to focus on practicing law, rather than running an office.
EXPENSES: THE CLARENCE MODEL HELPS KEEP SALARY COSTS LOW
EXPENSE PROFILES
EXPENSE PROFILE Salary, wages, rent and premises
Finance costs IT/communications
costs
Marketing and business
generation activities
Training and human
resources costs
Other
60%
9% 8%6%
4%
14%
52%
13%
8%5%
3%
18%
6 | Macquarie Business Banking
Other firms <$1m
People
The superior efficiency of Clarence members was typically made possible by very lean staffing models, supported by strategic use of outsourcing. On average, Clarence members had half the staff of other firms, with only 15% employing general administrative staff, compared to 44% of other firms. However, they were significantly more likely to use outsourced or contract lawyers (23% versus 15%), especially for flexible access to extra resources when workloads were high.
PEOPLE: STAYING LEAN AND EFFICIENT
AVERAGE HEADCOUNT
Other firms <$1m
5.4
2.7
FLEXIBLE/CONTRACT/OUTSOURCED LAWYERS
23%
41%
36%
Other firms <$1m
15%
44%
42%No and would not consider using them in the future
Yes
Not currently, but would consider using them in the future
REASONS FOR ENGAGING
44%
11%
0%
44%
56%
44%
Only for specific expertise
Only for additional resourcing
due to work
For both
89% OF LARGE FIRMS
$20m+ REVENUE
are either using outsourced lawyers or would consider doing so
2017 Legal Benchmarking Results special report: Clarence members | 7
Other firms <$1m
Technology and operations
Clarence members seem clearly convinced of the benefits of outsourcing, enabling them to focus on their core strengths while leaving support tasks to highly efficient specialists. They were significantly more likely than other firms to outsource a range of activities, from research and pre-litigation support to general legal work and business services.
However, they significantly underperformed even their small firm peers in current and planned adoption of new technologies, suggesting they could be doing more to build a platform for ongoing productivity growth. To take just one example, 55% of other firms are using or planning to use document management and scanning tools over the next three years, more than double the proportion of Clarence members.
TECHNOLOGY AND OPERATIONS: A FOCUS ON OUTSOURCING
FUNCTIONS CURRENTLY OUTSOURCED
Other firms <$1m
IT
Other business/ support services
Other legal work
Finance
Marketing
Pre-litigation support
Legal research
HR
Transaction support
Document review/ processing
eDiscovery
Intellectual property services
Due diligence
Contract negotiation
Contract review
36%
23%
23%
18%
13%
10%
8%
5%
5%
3%
3%
3%
3%
0%
0%
50%
19%
10%
27%
15%
3%
3%
8%
5%
5%
3%
2%
2%
0%
0%
None 31%
None 31%
Other firms <$1m
Using online collaboration tools to securely share documents with clients can be an easy way to increase efficiency and provide a higher quality service at lower cost.
13%
32%
FIRMS WHO COLLABORATE WITH CLIENTS ONLINE:
8 | Macquarie Business Banking
Other firms <$1m
Technology and operations
15%
16%
CURRENT AND FUTURE TECHNOLOGY USE
BACK OFFICE AUTOMATION
Clarence currently using
Other firms <$1m currently using
Future intentions
DATA AND ANALYTICS
3% 0%
8%0% 0%
0%0%3% 5% 0%
0%
Doc. mgmt & scanning
tools
OCR (optical
character recognition)
eDiscovery Decision dashboards
Data mining Predictive analytics
Distributed ledgers
(blockchain)
23%28%
44%
19%
10% 5%
11%
8%
0% 3% 1%2% 5%
0%3%
MANAGEMENT AND SYSTEM INTEGRATION
31%
6%
8%
0%3%
3%
Electronic document
signing
Knowledge mgmt tools
Electronic contracts
APIs & system integration
tools
Legal project mgmt &
pricing tools
51%
15%21%
13%
26%
35%
18%
8%3%
15%28%
18%
10% 11%
ARTIFICIAL INTELLIGENCE
13%
0% 3%
0% 5% 0%
0%
Automated doc review
and creation
Artificial intelligence
Expert systems
Chatbots
10%
21% 3%
6% 3% 5%
0%
8% 0%
10%
12% 6%
Time recording
tools
Workflow tools
Account automation
Accounts payable
automation
52%
5%
19%5%
15%
52%
24%
18%
20%
31%26%
2017 Legal Benchmarking Results special report: Clarence members | 9
Other firms <$1m
Technology and operations
Percentage of firms with gross fee revenue of $20m or more using or planning to use new technologies:
13%
70%
63%
LARGE FIRMS LEAD THE WAY ON TECHNOLOGY ADOPTION
WORKFLOW TOOLS
DOCUMENT MANAGEMENT AND SCANNING TOOLS
ACCOUNTS AUTOMATION
10 | Macquarie Business Banking
Other firms <$1m
Outlook and future growth
While many Clarence members have created a successful model, there is a risk that they could lose their competitive edge as other firms evolve. Asked about their focus areas for the next 12 months, Clarence members were much less likely to be active in a range of areas, including staff training (31% of Clarence members versus 53% of other firms), integrating digital technology 15% versus 37%) and accommodating flexible working (8% versus 23%). They were also much less likely to seek back office efficiencies – perhaps because they already see their offices as highly efficient.
Clarence members’ lack of activity was particularly striking compared to the large firms in our survey, who were significantly more likely to be active in almost every area we measured.
FOCUS AREAS: OPPORTUNITIES TO DO MORE
Adapting to accommodate flexible working
Back office efficiency
Cash flow management
Changing pricing structure
Consolidation
Developing new advice areas
Getting back to basics
Improve monitoring of business plans and performance
Increasing training and skills development
Spending more time with clients
Reducing costs
New product development
More effort on sales/business development and marketing
Managing staff
Integrating digital technology to improve delivery of legal services
80%
70%
60%
50%
40%
30%
20%
10%
0%
FOCUS AREAS OVER THE NEXT 12 MONTHS
66% OF CLARENCE MEMBERS FORECAST THAT FEE REVENUE WILL RISE BY
10% OR MORE
FY2018
Other firms <$1m
Large firms
2017 Legal Benchmarking Results special report: Clarence members | 11
Other firms <$1m
Outlook and future growth
Only around one in five Clarence members had a succession plan in place, versus one in three other firms of similar size. Even more remarkably, 63% of Clarence members with existing plans intended to make a gradual transition to a new owner for no consideration – overlooking opportunities for the current principals to enjoy the benefit of the value they have worked so hard to create.
SUCCESSION PLANNING: OPPORTUNITIES TO REALISE GREATER VALUE
FIRMS WITH AN OWNER PLANNING TO RETIRE WITHIN THREE YEARS
Other firms <$1m
19%
13%
FIRMS WITH SUCCESSION PLANS IN PLACE
Other firms <$1m
34%
21%
SUCCESSION PLANNING (AMONG THOSE WITH A PLAN)
24%29%
62%
0%
10%
63%
13% 13%
0%
13%
Gradual transition to new owner for
no consideration
Sell to another firm
Staff to acquire equity
Close doors Other
12 | Macquarie Business Banking
READY TO LEARN MORE?If you’d like to learn more about putting our best practice insights to work in your firm, contact me and my team.
Ian Marshall Head of Legal Industry Macquarie Business Banking
[email protected] 0407 020 842
This information has been prepared by Macquarie Bank Limited ABN 46 008 583 542 AFSL & Australian Credit Licence 237502 (‘Macquarie’) for general information purposes only and is based on statistics and information sourced from the 2017 Macquarie Business Banking Legal Benchmarking Survey conducted by Thrive Insights (‘the Survey’). This information does not constitute advice. Before acting on this information, you must consider its appropriateness having regard to your own objectives, financial situation and needs. You should obtain financial, legal and taxation advice before making any decision regarding this information.
Whilst Macquarie has taken all reasonable care in producing this information, subsequent changes in circumstances may occur at any time which may impact the accuracy of information. Graphs and forward-looking forecasts have been included for illustrative purposes only and have been derived from information provided by third parties that participated in the Survey. Macquarie does not warrant the accuracy of any information provided by any third party.
Past performance is not a reliable indicator of future performance. Forward looking forecasts are estimates only and are based on the Survey results. Macquarie does not warrant the accuracy of these estimates and actual results may vary based on a number of market, regulatory, financial and environmental factors.
© Copyright is reserved throughout. The information contained in this document must not be copied, either in whole or in part, or distributed to any other person without the express permission of Macquarie.
