NZ Law Firms Expecting Revenue Growth in 2016

New ALPMA/Crowe Horwath survey shows financially healthy NZ legal sector planning for growth

A new 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 80 per cent.

And the 10 best performers average $1.017m per partner in revenue while the average revenue generated per partner is more than $705,000.

The survey, conducted by business advisors and accountants Crowe Horwath and ALPMA, benchmarks the financial performance of New Zealand law firms.

“More than half (53.3 per cent) of the firms surveyed expect revenue growth of around five per cent in the coming financial year,” says Crowe Horwath Principal, Marnus Beylefeld. “This is broadly in line with New Zealand nominal growth expectations of between 3.3 and 5.3 per cent in 2016 and 2017”.

“Nearly three quarters (73.3 per cent) of respondents expect they will be hiring fee-earning staff in the coming year,” Mr Beylefeld says.

“Plans for growth are clearly on firms’ minds, and with operating profit margins of more than 30 per cent, that’s good news for the legal sector,” ALPMA NZ Chair and General Manager at Lowndes Jordan, Ms Sheryll Carey says.

“By far the biggest concern (57 per cent) for law firms in achieving their growth objectives is a general economic downturn,” Ms Carey says.

“It will also be important for firms to get their business development program right in order to win new business,” she says.

Results from the 2015 Financial Performance Benchmarking survey of New Zealand include:

• Operating profits before interest and taxes average $280,000 per equity partner.
• The 10 best performers have an average operating profit of $568,000 per partner and a median operating profit of $396,000 per partner.
• Non-equity partners’ salaries average $195,000.
• The median work in progress (WIP) and debtor-days lockup amongst all firms surveyed is 86.36 days consisting of:
  • WIP days of 24.95
  • debtors days of 59.52
• The average revenue generated per fee earner is around $352,000 and more than $705,000 per partner.
• The 10 best performers average $1.017m per partner in revenue and the bottom 10 average $431,000 per partner.
• Average gross margins* are 78.06 per cent and average net operating profits* 30.39 per cent.
• Average return on capital employed is an impressive 61.46 per cent, seven per cent ahead of historic Australian results.

This is the first year the survey has been conducted in New Zealand however Crowe Horwath and ALPMA have been running it in Australia for the past four years.  Thirty firms, representing a strong cross-section of NZ legal industry, participated in the inaugural research.

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,” Beylefeld says.

“It’s the only benchmarking tool of its kind in New Zealand to benchmark individuals as well as the industry.”

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.

* 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.

2015 ALPMA/Crowe Horwath New Zealand Financial Performance Benchmarking research report is available now.