Quarterly pulse survey report: Q3 (July to September 2022)

To complement insights from the annual survey, we developed a quarterly pulse survey to provide a timely barometer of business conditions for small and medium-sized solicitor firms.

This report covers firms’ experiences of quarter three (Q3, July to September 2022). 68 firms took part.

Main points from Q3 survey

• General activity levels amongst participants in Q3 continue to be muted. 24% of firms reported a quarter-on-quarter increase in chargeable hours, compared to 33% in Q1. However, more firms reported an increase than a decrease
• 17% of firms reported an increase in residential conveyancing matter starts, down on the 28% reported in Q2. A higher proportion of firms in Q3 reported a decrease in residential conveyancing matter starts: 40% compared to 21% in Q2
• Following a slight levelling of in Q2, the proportion of firms reporting an increase in overall expenditure continues to rise, from 56% in Q2 to 59% in Q3
• Firms continue to offer hybrid working arrangements to staff. The proportion of firms with 50% or more of their fee earners working in a hybrid relationship (37%) remains higher compared to those with a similar arrangement for support staff (23%)
• Cash positions have remained stable or improved for over two thirds of firms (58%), with a higher proportion expecting the same for Q4 (70%)
• 67% of firms anticipated fees would improve or remain the same over the next 12 months. 53% of firms predicted profitability would either increase or remain the same. 47% expected profitability to worsen over the next year
• Looking forward to the next six months, headcount is predicted to remain stable with a higher proportion of firms anticipating increases in the number of fee earners (30%) compared to the number of support staff (12%)
• The average interest rate firms are getting on their client fund accounts is 0.65%. Interest rates varied within the band range of client funds held, suggesting some firms could benefit from negotiating better rates
• Around three quarters of firms reported an increase in their recent professional indemnity insurance (PII) renewal. Data shows a wide positive spread in premium increases. The average change in premiums was 22.7%

Income, expenditure and new work

• 71% of firms reported fees issued either remained consistent or were higher than Q2. Almost three fifths (58%) of firms reported the number of chargeable hours recorded had remained static
• 17% of firms offering residential conveyancing reported an increase in new matter starts
• 59% of firms reported an increase in total expenditure

Staffing (working arrangements and pay)

• Headcounts remained stable
• 23% of firms reported that over half of support staff are operating under hybrid working arrangements
• 37% of firms reported that over half of fee earners were operating under hybrid working arrangements

Headcount

Proportion of fee-earning and support staff working in a hybrid arrangement

Cash position

• 42% of firms reported a worse cash position in Q3 compared to Q2 (April to June)
• 37% of firms anticipated a better cash position next quarter, compared with 30% expecting a worse position

Business confidence

• Around two thirds (67%) of firms anticipated their firm’s fees would improve or remain the same over the next 12 months, while 33% expected fees to decline
• 47% of firms expected profitability to decrease, compared to those who thought profitability would increase (20%) or remain the same (27%)

Headcount over the next six months

• Most firms predict headcount remaining stable over the next six months
• A higher proportion of firms predicted their fee earner headcount would increase (30%) compared to headcount for support staff (12%)

Interest rate on client funds

Firms were asked about the value of and interest rate on their client accounts, to identify the scope for firms to negotiate more favourable rates:

• just under two thirds of firms held less than £5 million in their client fund accounts
• the average interest rate firms are currently getting on the majority of client funds held by the firm is 0.65%
• this varies between and within the range of client funds held, suggesting some firms could be negotiating a better rate
• nine firms reported getting 0% interest on their client fund accounts
• one firm reported its interest rate was tied to the Bank of England base rate

 

What interest rate are you currently getting on the majority of your client funds?

Average range of client funds held	Minimum	Mean	Maximum	Number of firms
Less than £5 million	0.00%	0.42%	2.00%	40
£5 to £10 million	0.01%	0.65%	1.95%	8
£10 to £20 million	0.10%	1.33%	4.25%	11
£30 to £50 million	0.50%	0.95%	1.85%	4
Over £50 million	0.30%	0.30%	0.30%	2
All	0.00%	0.65%	4.25%	65

Changes to PII premium

From the Financial Benchmarking Survey, we know professional indemnity insurance (PII) costs represent the third largest cost after staff costs.

After the recent PII renewal round, firms were asked about changes to PII premiums compared to the previous renewal:

• around one fifth of firms (21%) had seen no change
• 74% of firms reported an increase
• 5% of firms saw a decrease
• the average change was 22.7%

No significant correlation was found between changes to PII premiums and changes to gross fee income, suggesting other factors were impacting on premiums:

• 7% of firms reported no movement in fee income in the last financial year
• 83% reported an increase in fee income
• 10% reported a decrease

We have commissioned Mustard Research to survey law firms on their experiences of the PII renewal period.

This research, to be published in spring 2023, will help us to identify the importance of factors impacting on premiums.

Participating firms in Q3

We would like to thank the 68 firms that took part in the Q3 pulse survey:

Paul Bennett, chair of the Law Management Section, said:

“The Law Management Section pulse survey is new and intended to support the profession with detailed data collection on current issues every quarter. We are delighted with the level of response. I encourage firms to participate next time and to help us grow the survey so they have the chance to help shape the knowledge of the current issues.”

Q3 compared to 2021 data

Additional insights can be gained by looking for changes between the quarterly surveys.

Some caution needs to be applied, as the number and profile of participating firms may differ between quarters. In Q3, 60% of firms had a turnover of up to £2m, compared to 92% in Q1. This difference may have an impact on aggregated findings.

As further data is collected, analysis will be conducted to look at differences by size of firm and for any seasonal effects.

The following charts compare data from:

• Q1 2021 (comparing January to March 2021 with October to December 2020)
• Q2 2021 (comparing April to June 2021 with January to March 2021)
• Q3 2021 (comparing July to September 2021 with April to June 2021)
• Q4 2021 (comparing October to December 2021 with July to September 2021)
• Q1 2022 (comparing January to March 2022 with October to December 2021)
• Q2 2022 (comparing April to June 2022 with January to March 2022)
• Q3 2022 (comparing July to September 2022 with April to June 2022)

Percentage of firms reporting an increase, Q1 2021 to Q3 2022

Percentage of firms reporting an increase in fee earner and support staff headcount, Q1 2021 to Q3 2022

Percentage of firms reporting an increase in cash position and anticipated cash position for the next quarter, Q1 2021 to Q2 2022

Percentage of firms predicting an increase in firm’s fees and profitability, Q1 2021 to Q3 2022

Data suggest over the last seven quarters:

• growth rates in fee levels, matter starts and chargeable hours have notably reduced. Levelling off in chargeable hours recorded in Q3 compared to Q2 (2022)
• expenditure levels have shown a steady profile of increasing (primarily assumed to be the result of inflationary salary pressures and offices returned to normal operating costs as people return to offices). Recent increases may be driven by higher inflation and energy prices
• growth in headcount of fee earners – and, to a lesser extent, support staff – has cooled, with a sign of improvement in relation to fee earner and support staff hires
• the percentage of firms reporting improved cash positions has steadily declined
• following six quarters of decline, anticipated cash position for Q3 has improved
• confidence (in terms of firms expecting a growth in fees and profits over the next year) has steadily declined