Financial stability
Firms must create a successful financial post-covid solution for their practice, says Viv Williams
Most law firms are sitting on more cash than they have had for a considerable time. Coronavirus business interruption loan scheme (CIBLS) loans, bounce back loans, furloughed staff and various rent and payment holidays mean expenditure is relatively low. However, we have to acknowledge that although we have had a period of calm during lockdown, we are starting to see the pressure signs returning.
As lockdown begins to slowly lift across the country and the furlough scheme comes to a close, we are beginning to see volume redundancies across all industries – and the legal profession is not excluded.
Many firms I talk to are anticipating anywhere between a 30 to 50 per cent loss of turnover in the current financial year. There are exceptions: most conveyancing practices are working flat out to deal with the volume of work coming through their doors which is pre-lockdown work that has just been waiting to happen.
However, if we continue to see the redundancies mounting, we have to question the long-term stability of the economy. A recession is looming and it could well be a long road to any form of recovery; and not the V-shaped recovery some have predicted. This new phase has started with firms making redundant highly paid individuals in non-fee-earning roles such as HR directors, marketing directors and senior business development roles.
We are currently in the centre of the storm. Firms dealt with the lockdown relatively well and most handled the urgent (with some anxiety); and were relatively successful in closing offices, furloughing staff and obtaining short-term funding. Going by the number of conversations I am having about future strategy, I suspect many firms are questioning their future.
Strong leadership
Do we need the amount of office space we had? What services can we profitably offer? Can staff remain working from home? These are just some of the questions being asked by law firm owners.
Some are even asking: do we wish to continue at all and shall we merge our practice (if a merger partner can be found in the current climate)? How do we adopt a strategy in these uncertain times? These are questions that firm leaders are asking themselves.
Despite the reduction in turnover for most firms, we are facing one of the hardest professional indemnity markets we have seen for many years. Some firms are facing substantial increases in premiums due in October. Firms can expect a 15 to 20 per cent rise in premiums – while others cannot even get cover.
Then comes the question of obtaining funding for the premiums. Those firms with either CIBLS loans or bounce back loans have to recognise that although they have been invaluable in the short term, they still need to be repaid. They are considered a liability when looking for additional funding for professional indemnity premiums.
Professional indemnity insurers are looking carefully at the financial stability of each firm, so don’t be surprised if firms are rejected because of the finances of the business. Many in the legal sector predict a significant failure rate in practices over the next 18 months.
Some pundits are suggesting a 60 per cent failure rate on the high street. This prediction has unnerved many in the sector, not least insurers, lenders and law firms. We are seeing large increases in renewal premiums for professional indemnity insurance and, in some cases, total rejection.
Couple this with the lenders viewing the finances of the firm with great scrutiny then the funding of premiums could become an issue. This means you must start the PII application process immediately. Do not wait until the last few days in September. If there is a chance that you cannot get cover, or your premium is unaffordable, then the sooner you know the better. At least you will have more time to find a solution.
For this reason, it is clear why the Solicitors Regulation Authority (SRA) would mandate that firms should actively monitor their financial stability and business viability.
Failing to plan
It is essential that you create a successful post-covid-19 solution for your practice. That can only be done by strategically planning what you, as a business owner, want for your practice in the next few years. Then there is the need to find the financial means of how to deliver it.
While firms can produce historical financial accounts, this only offers a ‘rear view’ of their performance. It does not explain firms’ attitude to financial management and so the approach to future performance remains unknown. We just don’t know what type of recession we are facing. Will it be V-shaped, or U-shaped or more like a Victorian bath?
Whatever the outcome, you will have to build your financial stability on the strategy you create here and now. There’s no point just waiting to see what might happen; it is essential you face the tough decisions that are facing all firms.
Trying to anticipate the quantity of potential new business for each department over the next six months will be very difficult and will depend on many things including local market conditions and the type of work you have delivered in the past. Anticipating what people are needed to deliver the work successfully needs to be thought through before the furlough scheme finally closes in October.
The end of furlough will inevitably lead to redundancies in many sectors including legal, and you should be scaling your business to the most profitable level. That means the bare minimum of your best quality staff required to deliver the work at exceptionally high standards.
Also, do you now trust these people to work from home; and do you have the IT in place to ensure adequate supervision? This logic may seem harsh but it’s essential if you wish to maintain financial stability and the survival of your business. Relying on traditional forms of bank overdraft will quickly become a thing of the past.
Investment in technology should also be part of your future planning to enable successful home working. Furthermore, people’s attitude to purchasing has changed during the lockdown; and having apps for services, client satisfaction and staff communication is becoming the norm for the more progressive thinking practices.
Without the luxury of an experienced finance director or a forward-thinking accountant who can proactively support the business, it is difficult to know what areas of finance should be reviewed and how to embed change. The approach to finance should never be about the money. Firms must focus their efforts on the cultural approach to cash management, supported by solid risk processes and procedures.
The number one mistake is doing this by yourself rather than engaging a trusted and experienced professional to guide the firm.
Cultural change
As well as this cultural attitude towards finance within firms, there has also been a significant change in culture among the owners, fee-earners and support staff.
One firm recently discussed how every fee-earner had a secretary prior to lockdown. Most of these secretaries had been furloughed yet the work was getting done without the need for such a luxury. I anticipate a number of redundancies in the foreseeable future.
As business owners, solicitors have generally expected their staff to be in an office within the agreed working hours or longer; but since lockdown they have noticed a change in culture. We now trust our staff more; and practice management software (if robust) has proven that despite the distraction of home schooling for some, the work has been done even if at unusual hours at times.
One firm told me it had closed two of its offices and were unlikely to ever reopen them. People working successfully from home without commuting had proved a great success for the firm’s overheads and for staff satisfaction. This is a significant cultural change that will probably mean we will never return to the way we were prior to lockdown.
Decisive action
No one has a clear picture of what the ‘new normal’ will look like which makes planning a long-term strategy extremely difficult. As law firm leaders, we must plan for the foreseeable future (which may only be a matter of weeks) with the information we have today.
You should prepare for the worst and adapt accordingly. Most importantly, do not put off essential decisions. If your choice is to find a merger partner then get help and start the process in the immediate future – do not wait to see what might happen.
It may not be the best time to sell your practice but there are interested parties looking to purchase law firms. I have seen some sensible transactions based not on the current situation but on the last three years performance. However, there are a number of predators looking to acquire distressed practices and there may just be too many of these to find a home.
I work as a non-executive director in several law firms. Many of these roles are being carried out by a weekly Zoom meeting but in each case we are making the tough decisions to plan the future and survive.
As we start to emerge from the centre of the storm and enter the next phase, there will be key moments that could be a catalyst. Professional indemnity renewal will be the first, with 70 per cent of the market still renewing on the 1 October (with the challenges outlined above). Tax payments due in January will be another trigger point; and all the covid-19-related loans such as CIBLS and bounce back loans taken out in March and April 2020 will need to start being repaid at the same time next year.
If the economy spectacularly bounces back in a V shape, many of the challenges I’ve highlighted could simply go away – will it be business as usual? No one can predict the future but what we can do is start a planning process that prepares our practices for the worst outcome.
Deciding that, all things being equal, this is what we will look like in a few years’ time; taking decisive action and not burying your head in the sand will enable you to take the small steps towards significant change.
Viv Williams is a law firm consultant at Symphony Legal symphonylegal.com
