Only 25% of law firms now use lockstep for sharing profits

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Leading law firms across Europe have increased their profitability by 15% following a continued surge in M&A activity, according to the annual survey carried out by BDO Stoy Hayward, the European Lawyer magazine and LexisNexis Martindale-Hubbell. The research analyses the financial performance and organisational structure of Europe’s leading law firms* across fifteen European countries.

The average profit per partner across the firms surveyed was €465,700 (£317,600) in 2006 compared to €406,300 (£277,100) the previous year. The most profitable in terms of profit per partner continue to be Italy (€1,323,300:£902,400) and the UK (€747,000:£509,500).

The increase in profits was also accompanied by a greater tendency for firms to use a more-leveraged business model (i.e. a higher ratio of staff to equity partners), with the proportion of fee-earning associates and assistants rising. Italy and Spain have taken the lead in terms of higher leverage: in Italy there are now more than nine fee earners to every equity partner.

However, in contrast to leverage increasing, the research has revealed that the lockstep system is dying out. Only 25% of all firms surveyed have lockstep as a method of sharing profits. Performance-based methods have taken over as the preferred system of profit sharing.

Other highlights of the research include:

■ a leap in the profit-per-partner figures for Germany’s lawyers, with their result in the upper quartile rising from €506,900 £345,700 (2005) to €1,052,900 £718,000 (2006);

■ German firms have replaced the UK as the jurisdiction with the highest fees per fee earner (with averages of € 328,000 £223,700 for Germany compared to € 300,000 £204,600 in the UK, the second highest jurisdiction in Europe);

■ Persisting cultural differences on the critical issue of how quickly bills are issued and money collected, with Italy the least efficient jurisdiction in this respect with an average of 117 days’ work in progress;

■ London’s legal secretaries get some of the best pay in Europe (€53,600 £36,600 in the upper quartile), but not as much as their Italian (€65,900 £44,900) and Belgian (€60,200 £41,100) counterparts;

■ Company, commercial and M&A work accounted for 27% of firms’ gross fee income;

■ Male partners continue to dominate the firms, remaining virtually unchanged at 85% (84% in 2005);

■ Recruitment and retention of staff are respondents main concerns.

Nick Carter-Pegg, Partner at BDO Stoy Hayward LLP and Head of Professional Services at the firm, added:

“Lawyers have taken advantage of the continued buoyancy of the market this year to earn record profits. The wave of M&A activity across Europe has continued during this period, again resulting in impressive results from those jurisdictions in which deal activity is particularly strong. With continued reports from private equity houses of funds available for investment, this level of activity may well be seen through 2007 too.

“However, law firms should not become complacent during this boom period with their cash management practices, which can often suffer during particularly busy periods for partners. Additionally, senior management should be looking forward and planning for when the market eventually does cool to ensure that their firm is well positioned strategically."

James Harley, International Marketing Director at LexisNexis Martindale-Hubbell commented:

“Competition amongst Europe’s leading firms for lucrative, high profile cross jurisdictional work has never been tougher. As the region’s leading firms seek ways to better understand their organisational structure and performance, with the help of our partners, we have once again been able to capture a uniquely diverse set of metrics that can be used by the profession to refine the architecture of their practices to drive performance and competitive advantage.”

Jeremy Fleming, Brussels Correspondent, European Lawyer said:

“The move to a higher leverage model across Europe appears to indicate a move to homogeneity amongst Europe’s law firms. However this surface similarity is belied by the other data from the report. Across many areas crucial to law firm management and practice: from remuneration strategies, through the type of vehicle used by firms in different countries, to their approach to marketing, there remain strong cultural differences."

"Lockstep" is where partners are primarily rewarded on the basis of their length of tenure (ie the longer they have been a partner, the greater the share of profits they get).

To read the full report click on the link above

Last updated -16 October 07

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