Law firms are slowly rebuilding profitability and beginning to hire again, according to a respected annual bellwether of the sector’s financial health.

Support staff numbers remain under pressure, however, and practices are bearing down heavily on non-salary overheads to boost the bottom line.

These are among the key trends revealed in the 11th Financial Benchmarking Survey, which is published today by the Law Society’s Law Management Section (LMS) and covers the 2010 accounting year. Two hundred firms took part.

Among the headline findings was an impressive 18.6% rise in median net profit per equity partner, from £89,621 in 2009 to £106,297.

About 21% of a practice’s total income was equity partner profit, compared with 18% in 2009.

After deducting a realistic notional partner salary from each practice’s results, this drops to 7.3% of fee income. While still low, this is a sharp improvement on the 2.3% reported in the previous year.

Fee income, by contrast, remained flat, with the median per practice rising just 0.2% following a 6.5% fall in 2009. Median fee income per equity partner fell 3% to £455,650.

The median cost of a fee-earner was £40,240, compared with £43,938 last time, while the number of support staff per fee-earner fell once again, from 0.71 in 2009 to 0.67.

This yielded an average saving per fee-earner of £830.

The ratio of partners to fee-earners remained static, at a median of one to four, while the median spend on non-salary overheads per fee-earner dropped to £35,551, down from £41,959.

For recruitment, the 200 firms surveyed spent £2.1m to hire 1,022 people. This was about 8% of the reported workforce, showing firms are beginning to recruit again.

LMS chair Nigel Haddon said: ‘Consolidation is a theme as firms strive to return acceptable levels of profit in an age of falling client spend.

'And we have to ready ourselves for increased competition from new entrants with different costs bases and margins.

'In this context, the median spend on people – 62% of revenue including notional salaries for partners – is perhaps just one area that will be subject to fairly relentless downward pressure. Another will be the ratio of support staff per fee earner.’

The survey (£150 for non-LMS members), which comes after a Gazette commissioned poll, is sponsored by Lloyds TSB Commercial and conducted by account­ants Hazelwoods.

For more information, see the law management section of the Society site.