NZ Law Firms Expecting Revenue Growth in 2017

Annual ALPMA / Crowe Horwath survey shows financially healthy NZ legal sector planning for further growth in 2017

An annual survey of New Zealand law firms shows the sector is expecting an average of five per cent growth in the next financial year—building on gross profit margins* that currently average nearly 78.7 per cent.

And the 10 best performers average $1,308,000 per partner in revenue, up from $1,017,000 in 2015, while the average revenue generated per partner is more than $803,172, showing an increase of 12 per cent from the 2015 survey.

The survey, conducted by business advisors and accountants Crowe Horwath and the Australasian Legal Practice Management Association (ALPMA), benchmarks the financial performance of New Zealand law firms. The first survey was conducted in 2015, making 2016 the second annual survey. However, ALPMA have been running the same survey in Australia for the past five years.

Nearly three quarters (74 per cent) of the firms surveyed expect revenue growth in the coming financial year compared with 53.3 per cent for firms last year.

“It’s pleasing to see the sector is still anticipating strong growth in revenue going forward however this is creating some challenges of capacity both in terms of staff and capital,” says Crowe Horwath Business Advisory Principal, Glen Gernhoefer. “Hiring expectations are very strong to help balance this with 94% of respondents expecting to hire new fee earning staff in the next year,” he says.

“The survey results clearly indicate the legal sector is in good health and it is encouraging to see the increase in areas such as operating profit and growth in revenue per partner since the 2015 survey,” says Gernhoefer.

“It is clear that the outlook for growth remains high, and with operating margins of more than 38 percent, an increase of 8 per cent from last year’s survey, that’s great news for the legal sector,” ALPMA NZ Chair and General Manager at Lowndes Jordan, Ms Sheryll Carey says.

“Macro-economic factors remain the biggest concern for law firms (41 per cent), however access and retention of staff has increased in the past year increasing from 10 per cent in 2015 to 22 per cent in 2016.” Ms Carey says.

Results from the 2016 Financial Performance Benchmarking survey of New Zealand include:

• Operating profits before interest and taxes average $369,000 per equity partner, up from $280,000 in 2015.
• The 10 best performers have an average operating profit of $659,000 per partner ($396,000 per partner in 2015).
• Non-equity partners’ salaries average $171,000, 12 per cent lower than in 2015.
• The median work in progress (WIP) and debtor-days lockup amongst all firms surveyed is 83.09 days consisting of:
  • WIP days of 26.25
  • debtors days of 53.81
• The average revenue generated per fee earner is around $368,206 compared with $352,000 in 2015 and more than $803,172 per partner, up 12 per cent from last year’s survey.
• The 10 best performers average $1,308,000 per partner in revenue and the bottom 10 average $422,800 per partner.
• Average gross margins* are 78.7 per cent and average net operating profits* 38 per cent.

Forty-one firms, representing a strong cross-section of the NZ legal industry, participated in the research in 2016. The participating firms also gain complimentary access to Open Measures, a proprietary Crowe Horwath online tool, to benchmark their firm’s performance against like firms.

“Open Measures gives the leaders of law firms the ability to easily assess their own firm’s performance against their peers,” Gernhoefer says.

In Open Measures (www.openmeasures.com) an operating unit can easily assess and review its performance against similar units across an organisation, over any time period. Visual score cards easily assess, track, rank and evaluate the performance of business units, franchises and divisions within an organisation or branches of a business.

Editor’s Note

*The gross profit margin is the margin after direct costs, predominantly fee earner salaries, have been deducted. Net operating profit is the profit available to partners before interest and taxes are paid.

About Crowe Horwath

Crowe Horwath New Zealand is the largest provider of practical accounting, audit, tax and business advice to individuals and small and medium businesses from a comprehensive network of over 20 offices. Crowe Horwath is part of a global accounting network that delivers high quality audit, tax and advisory services in over 100 countries. We are the relationship that you can count on—large enough to offer a range of expertise and skills and small enough to provide the personal touch.

2016 ALPMA/Crowe Horwath New Zealand Financial Performance Benchmarking research report is available now.