Profitability plummets at growing number of UK firms

Average profit per equity partner (PEP) has fallen at nearly half of the UK200 firms to have provided figures for 2012/13 so far, The Lawyer research has revealed.

Of the 86 firms that have provided PEP figures for both the last financial year and 2011/12, 41 (48 per cent) have seen PEP decline. Almost a quarter of those, 10 firms, reported that PEP fell by more than 15 per cent.

The greatest decline, of 52.4 per cent, was at HowardKennedyFSI, when PEP is compared with that of legacy Howard Kennedy, prior to its January merger with Finers Stephens Innocent (FSI). A significant expansion of the equity partnership led to a drop in PEP from £269,000 at Howard Kennedy to £128,000 at the combined firm.

But the equity share has risen from just 23 per cent of the partnership at legacy Howard Kennedy, to 84 per cent of the partnership at HowardKennedyFSI.

Chief executive Mark Dembovsky told The Lawyer last week (24 July 2013 ) that the firm had made “a concerted push” to bring salaried partners into the equity in the name of integration.

Manches saw the next biggest drop in PEP, from £235,000 in 2011/12 to £135,000 last year – a 43 per cent decline (24 July 2013 ).

Managing partner Melvin Pedro said: “Our financial figures for last year appear on the surface to be rather negative, but they demonstrate the investment that the management board and partners have made in steadying the firm in a post-recession market. The fall in PEP was expected and is a reflection of our investment in new people and infrastructure. We have also made some effective efficiencies throughout the firm.

“Overall, last year’s results were largely a reflection of losing a team from within our family department, a flat market for mid-size transactions, and the impact of the recession, causing many projects for clients to either be put on hold or to be postponed indefinitely.”

Morgan Cole managing partner Elizabeth Carr said its 37 per cent drop in PEP, from £258,000 to £162,000, was caused by “an issue in our premises portfolio”. Carr said PEP would otherwise have been around £200,000.

“For me the important thing is that we have a very varied client base. We’re finding income can be lumpy because clients’ needs vary, so you have to be able to deal with profit shifts between years. We’re just starting to see an upturn in corporate activity,” Carr added.

Scottish firms Dundas & Wilson , Maclay Murray & Spens and Turcan Connell were also among the 10 firms to have seen the greatest drop in profitability.

Dundas saw PEP fall 22 per cent, from £210,000 to £164,000 (19 July 2013 ). Managing partners Caryn Penley and Allan Wernham said the firm had been working to reduce costs and diversify its client base during the year.

Maclays’ PEP went down by 22 per cent, from £270,000 to £211,000, while Turcan Connell’s dropped by 18 per cent, from £385,000 to £317,000.

Maclays chief executive Chris Smylie said: “These results come at the end of a year which saw the firm carry out a root and branch strategic review. We are now in the implementation stage of that review and are focusing on the investment priorities it identified. We remain cash positive and are confident that we are now much better positioned to take advantage of the opportunities in this new marketplace than we were prior to the review.”

Turcan Connell senior partner Douglas Connell said: “What we’re concerned with as a business is total profit, which is £5.9m, and we make a lot of payments to fixed-share partners out of that. I’m pretty happy that the total profit figure of the business has been sustained throughout what has been quite a difficult year.

“We’ve refined our reward structure over the past five years and the distinction between equity and fixed-share partners is becoming blurred,” Connell added.

A number of other Scottish firms also experienced a fall in profitability last year, including Anderson Strathern , Gillespie Macandrew and Shepherd & Wedderburn . Conversely, Brodies reported 7 per cent growth in PEP.

Hill Dickinson managing partner Peter Jackson attributed the firm’s 15 per cent fall in PEP (15 July 2013 ), to a number of factors, including the end of a five-year rent incentive in Liverpool, investment in the firm’s London office, and also investment of more than £2m in a new practice management system.

Investment in IT systems was also a cause of the 21 per cent profitability decrease at Midlands firm Wright Hassall (9 July 2013 ), which reported PEP of £142,000 in 2012/13, compared to £179,000 in 2011/12.

At the other end of the scale, the 140 per cent profit increase at Wedlake Bell (17 July 2013 ) can, like HowardKennedyFSI’s fall, be attributed to a merger. The rise, from £135,000 to £324,000 between 2011/12 and 2012/13 compares legacy Wedlake Bell with the enlarged firm, following its April 2012 merger with Cumberland Ellis.

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