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Rising lock-up is putting UK law firms at risk of financial failure

Firms should emphasise the impact on working capital and profits to partners

3 August 2012

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By Manju Manglani, Editor (@ManjuManglani)

UK law firms are failing to tackle lock-up and are consequently placing a serious burden on their working capital and exposing themselves to increased risk of failure, according to recent research.

The survey found that law firms have failed to make progress in reducing lock-up days (unbilled work in progress plus debtors). In 2011, the average number of lock-up days was 130 days and one third of firms had lock-up in excess of 150 days. This year, the average number of lock-up days had increased to 148 days and lock-up was more than 150 days in 41 per cent of the firms surveyed.

“When looking at how to fund investments, you may wish to explain to partners how simply by improving working capital they could eliminate the firm’s overdraft, freeing up funding to permit further growth,” said Sarah Wilkinson, the former finance director at Field Fisher Waterhouse and current finance director at Fasken Martineau.

“I have found that it can be very powerful to explain to partners the impact of taking or not taking action in certain situations on their profits.” (See We need to talk)

“With bank finance still difficult to come by and economic growth lagging, we expected that firms would have responded to these pressures by reining in lock-up,” added Louis Baker, head of the professional practices group at UK accountancy firm Crowe Clark Whitehill, which conducted the research.

“Firms which allow their lock-up to continually build up during difficult times not only place a burden on their working capital, but increase the risk of work in progress not being fully billable and/or bad debt exposure. To improve their financing, firms must review their level of lock-up and take actions to permanently reduce it.”

The research also found that revenue has fallen at a quarter of responding firms over the past year. However, 71 per cent had experienced a growth in turnover; this figure was even higher in London, at 80 per cent.

Net profit at London firms averaged 40 per cent, making them more profitable than those in other major cities (36 per cent) and regional locations (26 per cent) in the UK. London firms also experienced higher levels of profits per partner, profits per equity partner and fees per fee earner than firms in other locations.

In terms of partner numbers, 42 per cent of responding firms had no change in numbers and 27 per cent had reduced their partner headcount. At 60 per cent of firms, staffing levels were frozen or cut. 

The average professional indemnity premium as a proportion of turnover was 1.57 per cent for the largest 50 per cent of responding firms (by turnover), compared with 3.67 per cent for the smallest half of responding firms.

The survey findings are based on responses from over 50 UK law firms, with revenues ranging from less than £1 million to £200 million. The research results are published in Solicitors’ Benchmarking Survey 2012.

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