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Legal sector SMEs see profits grow despite fee income falling

SME legal firms saw fee income fall during the first period of the Covid-19 pandemic, but the sector’s resilience meant that profits rose moderately by 6%, a detailed, qualitative survey by NatWest shows.

The detailed survey and analysis of management information data of 40 legal firms found that fee income fell by an average of 8% but profits per equity partner increased by 6% for a six-month period immediately after the onset of the pandemic last year. The increase in profits was due to reduced expenses, including legal firms that made use of the Government’s furlough scheme to reduce salary costs or the VAT payment deferral for the initial uncertain period of the pandemic. Law firms also cut costs, such as reducing contractors and deferring bonus payments for partners, or took the opportunity to pivot their business models when fees fell initially.

Residential conveyancing work for SME legal firms saw the biggest expansion, becoming the best performing area for many firms (over 46% of firms surveyed) after the first lockdown eased and the stamp duty holiday was introduced. The practice area that struggled the most was commercial due to a lack of business confidence and suppressed mergers and acquisitions activity.

 

David Weaver, Head of Professional Services, NatWest, said: “Our detailed analysis and survey shows that the legal sector remained highly resilient despite initial fears around liquidity. Government support helped provide the buffer that mid-market law firms needed to withstand the lockdown so that they could serve clients when demand returned, as well as giving them a safety net to take advantage of future investment opportunities. Looking forward, legal firms should aim to retain capital to help them with their growth strategies but also consider how best to engage staff and attract new clients as the UK emerges from the pandemic.”

 

Robert Mowbray, Author of the Report, said: “The rapid introduction of the furlough scheme allowed firms some time to plan and think about how best to survive. Many firms had learned a lesson during the financial crash a decade earlier that cutting back too aggressively would leave them unable to cope with the increased demand when it returned. The calm approach taken has resulted in a good outcome for many firms that are now well placed to prosper as the economy bounces back. Firms were relieved to find that clients paid bills promptly and there was less need to make use of emergency funding than was feared at the start of the pandemic.”

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