Management flaws put profits beyond the law: Recession has left a select band of legal firms pulling away from their rivals, writes Roger Trapp

CONTRASTING fortunes are evident in a survey of Britain's law firms just published by Coopers & Lybrand, the accountants and management consultants.

The comprehensive, nationwide examination of 900 practices demonstrates that, while the recession may have done away with the idea that there is such thing as a poor lawyer, many are still thriving. About a half the firms surveyed had improved their profitability in a difficult market, with about a fifth increasing profits and fees by more than 10 per cent.

On the other hand, 12 per cent reported fees down by more than 10 per cent, while more than a quarter saw profits fall by a similar margin. Altogether, about a third of practices saw their financial position worsen.

The key, according to this second annual survey commissioned by the the Lawyer, the legal magazine, is not size. Although larger firms have generally increased professional numbers more than smaller ones, this has not been reflected in improved profits.

Financial management is the crucial factor. Attention to this is allowing a minority of firms to pull ever further away from their rivals, while at the other end of the scale a 'sizeable rump' is falling further and further behind, with the result that they may soon lose their best staff and best clients and ultimately go out of business.

Brian Woods Scawen, the Coopers corporate finance partner who led the survey, said: 'The results validate the concerns Coopers & Lybrand were expressing after last year's survey: namely that those firms which do not acknowledge the chain reaction of good financial management, increased profitability and capacity to invest will be left in the traps, while those that do will be on course to succeed in the difficult new market conditions.'

The survey, published last week, showed that only about a third of legal practices had the full range of management information required for effective planning and management. A fifth did not have an approved budget, three-quarters did not measure working capital monthly and two-thirds did not measure cash flow monthly.

The wide range of profitability is at least partly due to the varying levels of control that partners exercise over staff and property costs, says Coopers.

Staff costs ranged from 40 per cent to more than 50 per cent of fees, while property costs varied from less than 10 per cent to more than 15 per cent of fees.

But support staff numbers also play a part. More than half the firms had reduced their numbers in the past year - part of what Coopers believes is an irreversible trend. Firms that do not act decisively in this area are putting themselves at a distinct disadvantage, it feels.

However, the vast majority of firms still employ one secretary for each fee-earner, despite the substantial recent investments in information technology.

Nevertheless, nearly 50 per cent of firms expect to employ more staff in the coming year and nearly three-quarters predict increased profits.

This view is not shared by Coopers & Lybrand. 'We think that the optimism expressed by many of these firms about their short-term prospects may be misplaced; a sizeable proportion are likely to have their prospects dashed by their own poor financial management,' Mr Woods Scawen said.