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UK law firms are failing to ensure financial stability

Fee earners are neglecting pipeline management in favour of billables 

2 May 2014

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By Manju Manglani, Editor (@ManjuManglani)

UK law firms are failing to implement sound financial management principles to ensure their long-term business sustainability.

That's the view that emerged yesterday at the annual conference of the law management section of the Law Society of England & Wales.

The problem, speakers noted, lies in many large firms failing to regularly monitor their balance sheets and simultaneously allowing partner drawings to deplete cash reserves.

Another cause of financial instability is fee earners failing to fully engage with pipeline management, with many neglecting business development and fee collection in favour of billables.

"There are too many law firms and there are too many solicitors in the UK," said Mark Jones, head of the professional practices consultancy and former managing partner at Addleshaw Goddard.

"The current consolidation process is a response to the laws of supply and demand. So we either let it happen to us or we use it as an opportunity to improve our business."

Engaging partners in pipeline management

Pipeline management is key to ensuring financial stability. "Lawyers and partners don't do enough to go out there and win new work," commented Nick Jarrett-Kerr, a management consultant and former managing partner.

There is a five-stage process to creating value: get the client/referrer; get the instructions, do the work; bill for the work; and collect the fees, said Barry Wilkinson, founding partner at Wilkinson Read & Partners.

"If you neglect the beginning, the pipeline empties, but if you neglect the end, all of the effort is wasted," he noted.

"As professionals, we assume the one thing in the middle - doing the work - is most important, but without the others, you haven't got a business."

The key, said Wilkinson, is to get all fee earners engaged with all stages of the process, particularly the latter stages of billing and collection.

"The biggest blockage is fee earner fear of the client," he said.

Fee earners are often unable or unwilling to hold "essential conversations at key points in the matter progress about payment terms, variations, collection and other financial aspects of the matter".

But, partners need to "act like business owners, not self-employed jobbing lawyers," he said, if law firms are to have long-term financial stability.

Cash reserves vital to business growth

Aside from engaging partners with pipeline management, managing partners need to pay close attention to their firms' finances, speakers said.

In particular, managing partners need to ensure that they are building sufficient cash reserves to fund future investments in the business.

"It involves having the right mindset: what do we need to do to run the firm effectively and build a war chest to invest strategically?"

This means, among other things, not allowing the firm's cash reserves to be depleted at the end of each financial year by partners.

"The lesson is to match the partners' drawings with the cash coming in," said Jarrett-Kerr. "The bigger the firm, the more there seems to be a disconnect."

"The question of drawings should be looked at very regularly. If you can align them with cash collection, all the better," he added.

The challenge, said Wilkinson, lies in how financial strength is usually measured in law firms - in terms of profits per equity partner.

"As the American saying goes, profit is an opinion, but cash is the reality," he said.

Wilkinson also noted that many large firms don't produce and analyse balance sheets on a regular basis, which makes them more vulnerable to failure.

"If you produce these on a regular basis and keep an eye on them, you cannot fall over."

Leadership and firm culture key

Ultimately, managing partners need to build a culture in which all fee earners and partners believe they are 'in it together' for the long term, speakers noted.

"The culture of your firm may override much of the implementation. You need to make the right decisions on your business model," said Wilkinson.

"It's your problem, but it is a solvable problem, and it is about leadership," he added. "Your staff can only implement the model you design and the systems you operate."

"The most important thing is teamwork," commented Jones. "If your firm doesn't have the teamwork to achieve whatever it wants to do to improve the business, it won't succeed."

Added Jarrett-Kerr: "Unless people are able to keep pace with the firm's improvement, they are going to get left behind."

 

 

 

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