Critical time ahead for PI firms

On 23 February 2017 the government published its detailed response to the recent Ministry of Justice consultation on ‘Reforming the soft tissue (whiplash) claims process’. It is looking to introduce the reforms on 1 October 2018, meaning personal injury firms have a short window to make some business-critical choices that can help them navigate their future.

Any firm dealing in claimant PI must have its future strategy under the microscope. The operational and financial pressure has never been more acute and the relentless challenges to the profitability of carrying out PI work remain an ongoing concern.

When Lord Justice Jackson’s April 2013 reforms landed, it was thought that the sky would fall in, and some firm owners and commentators believed the only options were to ‘get big, get niche, or get out’.

Well, firms of all shapes and sizes have struggled since, whether they are big and niche, small and niche, or simply have PI as part of a wider-service firm. There is no longer easy money in PI.

The insurance industry continues to play hardball with claimant firms, drawing out negotiations on claims resolution and costs and exposing those firms that systematically overcharge and inflate costs by challenging their bills, with scrutiny from the Solicitors Regulation Authority as a consequence.

There are many unforeseen difficulties that have also come into play – retainer challenges on transfer of cases between firms, approved costs budgets being battered by proportionality, and a crippling hike in court fees, to name but a few.

‘New market entrants’ is not too far adrift of being a dirty word and many who set out their stalls to be industry firsts have found that the spotlight on their demise is extremely public and unrelenting. Plus, we see creditors ‘parked’, phoenix firms and owners allowed to practise unfettered by past poor trading history, and an unpalatable unravelling inevitable.

To stay or exit?

The choices for many PI law firms are stark. So, what areas should firms be looking at to avoid financial, regulatory, or public pain? The ‘stay’ or ‘exit’ options are broadly as follows:

• Trade on in a leaner and more profitable way;

• Acquire PI caseloads, teams, or firms;

• Be acquired;

• Trade out and run the PI caseload down; or

• Dispose of PI by sale at best value.

Whether you ultimately decide to stay or exit, your starting point is a consideration of the following:

• Reduce debt;

• Increase cash flow;

• Reduce work in progress and disbursement lock up;

• Have you diversified in recent years and added serious injury, clinical negligence, occupational disease and noise-induced hearing loss, or holiday sickness claims to your suite of services in PI? How is that working out for you?

• Have you experienced a hardening of attitude from insurers? Has this resulted in thinner profit margins, WIP and capital lock up, or a negative impact on cash flow and profitability? If so, do you understand why the insurance sector has hit your firm and can you change that?

• Are your case acquisition costs stacking up?

• Are your cases being run expertly?

• Do you know if you are running cases with no prospects?

• Is your WIP real?

• Are you profitable?

How good are you?

In terms of what ‘good’ looks like, what do you really know about your business and how you fare against your peers in relation to your:

• Case management system, both in terms of its utilisation and the potential for development;

• Governance and oversight regarding fee earner technical capability, financial performance, and risk management;

• WIP valuation, financial forecasting, and cash collection; and

• Management information?

Understanding your future in PI

It’s critical to take a truthful look at whether your PI work is profitable and what it could look like with reform firmly on the horizon. Let’s face it, it’s only going to get worse – not better – so if this work is not paying its way, cutting your losses and getting out may be the best decision you make. Alternatively, giving it a radical shake-up may be your best chance at a future.

Ensuring your PI work is as lean and profitable as possible will make you agile to react to the opportunities and challenges ahead, be that to stay or exit.

Any firm wanting to achieve this should commission an independent review of their PI work to identify areas that are capable of improvement and can enhance profitability now, as well as setting them in good stead to make sounder business decisions in the future.

If you are embarking upon a sale or being acquired, carrying out independent expert due diligence before going to market ensures your PI caseload and WIP valuation is maximised. This exercise can make a deal look far more attractive and increase its value.

There is of course a final option, and that is to do nothing. But surely any firm doing nothing will inevitably fail. So, if that is your plan, perhaps you should read this article again.

Lesley Graves is founder and managing director of Citadel Law

@Citadel_Lesley

www.citadel-law.com