Improving profitability

In my last article I considered the questions personal injury firms should be asking themselves at this critical time of government reform. Now it is time to look at improving their profitability and banking relationships.

Banking relationships are crucial to underpin the significant funding requirements of PI firms, particularly in high-value and complex claims with high WIP and disbursement lock up. With uncertainty ahead, banks are understandably cautious, and while they still have appetite to lend, they require assurance around a firm’s PI business model and future profitability.

Other funding options?

When bank funding runs out, some law firms turn to secondary funders. I have witnessed secondary funding in PI claims with poor prospects, which casts doubt on some funders’ lending criteria. Let’s be clear – funding poor claims with increased debt does nothing to help law firms. So, what’s the answer?

Whenever I am asked to look at firms’ funding requirements I never treat it as a one-dimensional exercise. The last thing I want is for a firm to become debt ridden with bank or secondary funding, incurring hefty arrangement fees and interest charges, struggling to operate within its facility, and requiring constant review and facility extensions.

Therefore, rather than proceeding straight to increasing debt, I prioritise the unlocking of WIP and disbursements to generate cash and improve profitability as part of an overall financial strategy.

Complexity and value

Billing targets are usually key drivers of financial performance and set the tone for conversations with banks when renewing facilities and strengthening banking relationships.

The PI claims usually attracting the closest scrutiny are high-value, complex claims carrying high WIP and disbursement lock up. In every firm I have worked with, I have found claims within this category that are capable of settlement and generating cash.

Fee earners working on demanding caseloads often proffer many reasons as to why settlements are delayed and billing targets cannot be achieved. However, a targeted and strategic approach can support fee earners to bring cases to settlement.

Liability admissions

Look to deliver some ‘quick wins’ on cash realisation by focusing on liability admitted claims as these could be capable of fast tracking to settlement. Identify what is holding them up from settling and address that as a priority.

If a claim is not ready for settlement you may still release cash by requesting interim payments on account of disbursements and sometimes profit costs. This depends upon whether you have issued proceedings, your relationship with the opponent, and insurer tactics – you will find that some are more amenable than others to making interim payments on account of costs.

The following checklist is a fundamental starting point for firms looking to improve the settlement pipeline of PI claims and realise cash from locked-up WIP and disbursements:

• Liability admitted claims. How many do you have and what is required on each to achieve final settlement?

• Interim payments on account of costs and disbursements. Are your fee earners requesting these from third-party insurers when liability is admitted or do they wait until final settlement?

• If interim payment requests are being made, how successful are they? Opponents may raise valid objections. If so, address these to change the course of the litigation and costs strategy, thus preventing issues from stacking up later that can impact negatively on costs outcomes.

• WIP and proportionality. Do you assess proportionality risks? How do you monitor this to ensure WIP does not hit disproportionate levels?

• Are part 36 offers made to leverage increased damages, indemnity costs, and combat proportionality arguments?

• What is your policy regarding use of the rehabilitation code and the serious injury guide? Do you know how to increase outcomes in quantum and in costs?

• Costs mediation. Are you using this as an alternative to court, thus reducing fees, delay, and uncertainty?

• Are you getting value for money from your costs lawyers? How do you know?

When considering these points, you may find knowledge gaps in commercial awareness and litigation and negotiation tactics that, once understood, can be overcome and profitability and cash flow improved.

Demonstrating value

If a firm can demonstrate that it is tackling its WIP and disbursement lock up, and generate positive results in cash realisation, this should, in turn, instil confidence in its bankers to fund with confidence.

Trading through these difficult times is not going to be easy for PI firms and the banking sector. However, there is substantial opportunity for those firms bold enough to tackle the age-old issue of WIP and disbursement lock up and fee earner commerciality.

Why not use the forthcoming PI reforms as the catalyst to kick-start your firm towards a stronger, more profitable, and commercially savvy future with confident bank relationships to boot?

Lesley Graves is founder and managing director of Citadel Law

@Citadel_Lesley www.citadel-law.co