Law firms with a turnover of more than £5m often struggle to turn further growth into greater profitability, according to benchmarking research seen by the Gazette.

The research, conducted by accountants Crowe Clark Whitehill (CCW) in co-operation with 62 UK law firms, shows a marked increase in profitability for firms that have grown to achieve a turnover of £5m.

But once they pass this threshold, the correlation between size and turnover on the one hand, and measurements such as efficiency and profitability on the other, breaks down. As firms increase their turnover beyond the £5m mark, their level of profitability and efficiency tends to plateau rather than increase in line with the turnover figure.

CCW chair David Furst said the research findings went against received wisdom that mid-market firms are struggling because they lack the critical mass required to achieve significant economies of scale, and therefore need to find merger partners to maintain and improve profitability.

Whereas firms with a turnover of less than £5m had less growth and lower profits than larger firms, there was a ‘fairly even spread’ of growth for medium and larger firms. Niche firms tended to outperform full-service firms of the same size.

Tim Nash, chief executive of £15m-turnover firm Edwin Coe, said: ‘Over a certain size, firms achieve the critical mass needed to follow their chosen path, whether that is to specialise further, or to aim for the volume market.’ He noted that some strategic investments, such as ‘sophisticated’ IT solutions, had become ‘scalable down to quite a low level’.

‘Clearly firms need some critical mass,’ Furst added. ‘But it is pleasing to see that a firm can be at the lower end of the mid-market, and still be run as efficiently and profitably as many larger firms.’

The average profit per partner in the research sample was £181,652, and £225,633 for an equity partner. Only one firm with a turnover of less than £5m had PEP of more than £200,000. London firms were more profitable than those based in other major cities.

The research shows that many firms could improve their cashflow by reducing the average number of ‘lock-up’ days for unbilled work. The average was 130 days, though one-third of firms had lock-up in excess of 150 days. In general, smaller firms had less lock-up than larger firms.

‘There is obvious room for improvement here,’ Furst noted. ‘If they are billing on a monthly or quarterly basis, firms should be able to aim for 120 lock-up days.’

Some 52% of firms reduced partner numbers last year, while 37% reported an increase. The average increase in firms’ turnover was 3.5%, though 35% of firms reported a fall. Just over a quarter grew by more than 10%.

Firms that participated in the CCW research ranged in size from three firms with a turnover of less than £1m, to one firm with a turnover of £1bn. Half of the firms have a head office in central London.