Firms should embrace corporate governance as a matter of course

The end of October is the end for many firms who cannot obtain professional indemnity insurance. We know that about 200 firms have reported to the SRA their inability to obtain insurance; but it is envisaged that double that number could be about to close.

Since the assigned risk pool was abolished there is no safety net for those firms who cannot get insurance by the end of October and they then have 60 days in which to close down, sell their books of business etc. Arguably, many of these firms have been operating in a zombie state for some time and this is only the first catalyst that many firms have been dreading.

Just the beginning

We have seen a number of high-profile closures and pre-packs; this is just the beginning of the challenges the profession is facing.

We have known for some time that we have too many law firms; many delivering a substandard service to their clients. It is not about the quality of the legal advice but the lack of client care and poor delivery standards.

Obviously that is not true of every practice. Firms that understand the necessity of running their practice as a business and provide a first-class service will not only survive but will thrive as the market continues to improve.

Many firms that have consistently relied on bank borrowing are now realising that if they only billed their work in progress, monthly wherever possible, and once billed, chase their outstanding debts their exposure to their bank would'¨ be mineralised.

This all begins with the letter of engagement that every solicitor sends '’ or should send '’ to their client before commencing work. This is when you have the opportunity to inform clients of your interim billing policy and seven-day terms of payment.

Next is the successful collection of outstanding invoices. Ensure your credit policy has encouraged your colleagues and fee earners to obtain clients' mobile phone numbers, then have your credit controller call the client when the debt is no more than seven days' overdue and offer to help by taking payment over the telephone by credit or debit card. Trust me, it works.

You should also consider limiting your exposure in terms of your professional indemnity risk to the value of each matter. For example why not state in your engagement letter that you limit the amount of any claim to what is deemed acceptable? You do not have to provide your full professional indemnity cover for every matter. Limit each potential claim to what is fair and reasonable and your insurer will love you and potentially reduce your premium.

Higher risk

There will be other events that will push zombie firms into oblivion such as an interest rate rise, HMRC policies, or a hardening of the banks' attitude towards the profession. As more practices fail or are pre-packed it is natural for the profession to be perceived to be a higher risk.

The SRA ran a COLP and COFA conference last month, which was a great opportunity to help firms with practical help in running their practice as a business. The financial stability sessions were oversubscribed and the 500 delegates were clamouring for further practical information. When will our regulator realise that there are people who provide this help every day to law firms and being the regulator does not mean they are best placed to provide the only advice?

This brings me back to those firms that are embracing change and becoming more corporate in their approach to running their practice as a business. The race to become limited liability companies is increasing and running a practice with more corporate governance, instead of a collegiate approach, is an essential ingredient for survival.

The zombie firms will fail in any event and we will have a very different landscape within the next two years. How do you make sure you are not among them? Stop procrastinating and embrace change. At the very least, take advice from professionals about becoming a limited company that could not only allow you to buy your own goodwill but also resolve any succession and exit issues. SJ