Reflecting on the past and looking to the future

Introduction 

In this article, we seek to share some of our experiences of the recent past and attempt to look into the immediate future. As a business that is actively engaged at all levels of the legal industry, dealing with law firms of all sizes from high street, to multi-national firms, insurers, regulators and The Law Society, we have a multi-layered insight into the market.

We have seen first-hand how firms are and have responded and the external influences that have impacted how firms operate.

We hope this article provides law firms and their owners with ‘food for thought’ on some of the issues they may want to consider for the immediate future to protect, maintain, secure and grow their firms.

We will explore in future articles medium to longer-term strategies.

The journey so far 

Like most sectors and businesses at the present time, the future looks a little (or maybe a lot) uncertain. There is no doubt that for most firms, COVID19 and lockdown has caused damage.

At the start of the crisis, there was general concern over the future stability of firms as the Coronavirus pandemic forced us into remote working solutions and uncertainty about who and when people would buy legal services.

In the very early days of lockdown the position was very serious. The market was bracing itself for law firm failures, and a drive to find merger partners as firms looked for ways of securing their futures. The SRA and the Law Society were on standby to address the issues that would fall out from a market in trouble, with support being lined up for the potential interventions that would occur.

Government funding had not been established with furlough schemes, Bounce Back Loans were not in place and early attempts to secure The Coronavirus Business Interruption Loan Scheme (CBIL S) were often refused. Early on the concerns and the projections were made with some justification. For many the outlook was bleak.

When the Government announced how it would provide financial support to businesses generally, including law firms, there was an immediate release of pressure. Many firms used the furlough scheme to stabilise the firm and ensure they kept a core of staff operating and servicing clients, whilst others were placed on furlough to relieve cash flow issues. The result was almost immediate with the Government making first furlough payments within weeks of its announcement.

Adding to this, the welcome news of the Bounce Back Loans, and the fact that the doomsday scenario of people and businesses not buying legal services at all didn’t happen, the market started to see a way forward.

For a number of firms cash flow stabilised and for some improved, and some security set in. As lockdown eased and the Government’s SDLT reduction scheme took hold, there has been a property boom. Most firms are reporting a significant increase in new property instructions with, for some, a resultant scramble to increase headcount to keep pace with demand. Added to the restrictions on landlords being released, the landlord and tenant departments started to see the backlog of issues being released, and instructions starting up again.

At the start of the crisis, there was general concern over the future stability of firms as the Coronavirus pandemic forced us into remote working solutions and uncertainty about who and when people would buy legal services.

Current and Immediate issues 

The result of all this activity has continued to sustain firms and maintain financial stability, but are there firms who can report this safe, and is their future now more certain? Are some of the earlier issues identified still a reality for many and the impact of the issues discussed above have simply shifted the timeline? Some of the issues firms may want to consider as they look to their immediate and medium term futures are listed below. This, we are sure, is not a complete list, but hopefully enough to draw attention to issues that are real. Enabling firms to consider how they could and should prepare themselves.

Furlough ending & Resources 

For many firms, the furlough scheme has come to an end as staff either returned to work or they have been made redundant. There are some firms who have still not made a final decision on whether all roles are needed and therefore staff will return. For those firms, they face that decision and the cessation of financial support, which will immediately increase their expense base and impact on the cash flow. It is important to now commit to a decision either way, and ensure that the staff returning have a role and can add value back into the firm. It may not quite be the time to look at removing positions, but relocation of resource to ensure best value is obtained and each person has a justified position. For many firms, a reduction in hours and job shares has been a positive solution for some staff. What is important is to make sure that the firm is not caught out by the increasing outgoing monies and returning to a position where there are roles in the business that are no longer justified.

The inevitable reduction in property instructions 

There is currently no indication that the current SDLT holiday will be extended and therefore, come 1st April, 2020 those property purchases that have not completed will see the stamp duty payable at previous rates. This will undoubtedly have two impacts.

  • Some purchasers will pull out of transactions due to missing the deadline.
  • The market will start to return to ‘normal’ levels as properties will exit the market.

With many firms reporting an increase in instructions over the past few months of 150% on this time last year (and more), residential conveyancers are carrying excess portfolios, or firms have needed to recruit to ensure they have the resource to cope with the volumes.

Firms should be considering what happens if the market plateaus or shrinks. This will leave firms with too many staff and facing the same issues as they did in March/April this year, and whether they can sustain their property team. It is important to note that for many firms property provides a steady inflow of cash due to the short life cycle of most cases, and a reduction in volumes will hit the cash flow hard. This must be prepared for. It may of course be the case that a decision will be taken to extend the SDLT holiday, which would be sensible as it will maintain a buoyant property market. It may be that removing the SDLT holiday will not result in too many people exiting the market. It may however be the reverse.

Firms are well advised at present to use some of the increased income and profits to invest into technology, service levels and marketing. The latter will generate more organic new business and therefore will hopefully reduce any overall drop in transactions and maintain a healthy department. The investment in technology and service will result in improved ways of working, providing cost reductions for the future and provide a more sustainable and efficient department.

Payments holidays and Loan repayments 

Firms are clearly aware that payment holidays, loan repayments and ‘favours’ from creditors will still be there and repayments will hit towards the end of this year and into 2021. Taking into account the increase in outgoings, alongside the potential increase in expense (see above) or the reduction in income, will enable firms to scenario plan and establish what reserves may be needed. For some it may be that accelerating payments now will be of help, as it avoids the problem later. For other firms where cash is needed, it is essential to plan for the repayments and either take action now to increase income through investment, or start planning for the necessary expenses reduction before they are forced upon you.

Redundancy Costs 

If redundancy is in the future path for the firm, it is important to understand the true cost of redundancy, making sure you get the redundancy process and consultations right to avoid claims for constructive dismissal or discrimination from being raised. Redundancy costs can be surprising and although there are long term savings to be achieved, the immediate outflow of cash can be prohibitive. This may lead to phasing redundancy in line with cash flow.

Lenders 

Firms must be acutely aware of their borrowings and ability to repay. We are already seeing banks questioning the ability of firms to meet repayments, particularly where a firm has an overdraft which is well used, or if the bank is aware of other borrowings. If your firm is currently in an overdraft, be prepared for your bank to challenge or even seek to reduce their exposure and do so quickly. Whilst most firms enjoy positive relationships with their banks this will not stop them from asking questions. If they do, you must be ready to demonstrate through effective planning and cash flow forecasting that you are in control and that the firm is more than capable of meeting repayment commitments. Where this may not be possible, facing the issue now and taking positive action such as loan consolidation, reduction in expenses, increases in income or considering a merger is better now than when you find yourself in a weaker position with financial issues arising. The latter will drive a very different set of behaviours leading to quick and sometimes wrong decisions or actions that the regulator would be concerned about.

Insurers

For those firms who renewed their insurance in October, they will be aware of the work needed to secure reasonable renewal terms or to control any increase in premium. The increases across the market are well documented. Much of the justification for increasing premiums is the current uncertainty in the market and a fear of firms struggling into the future, leaving the insurers with exposure and no firms to collect the premiums from. If your firm’s desire, as it should be, is to control your premium and minimise an increase in premium, you will need to demonstrate that you have a good risk profile to your Insurer and importantly that you have financial security which you can show through a well throughout strategy and positive action being taken. It is also essential to start your engagement for renewal earlier, so you have options and not to leave it to the last minute.

SRA

The SRA are well aware of the concerns surrounding the legal market and they will be looking hard at firms and their solvency. All law firms are expected to manage their firm effectively and this also means being fully aware of your financial position and planning for challenging times. A law firm running into financial difficulty must be reported to the SRA or the COFA and the firm is put at risk. This would be considered a significant event. To avoid an enquiry or investigation a firm must be able to demonstrate how they are planning to avoid insolvency. By far the better solution is to avoid a report to the SRA or insolvency by planning and taking the necessary action now.

Mergers and Acquisitions 

For some firms the moving into an M&A situation may be the best option, but this takes time and if you think your future may be uncertain preparing for a merger or sale may be an option for your firm. Doing this at a time when the firm is not facing financial difficulty will enable focus and for you to get the best possible terms for the Partners/Owners and the staff. An acquisition that occurs due to financial difficulty or regulatory pressure is often rushed and there will be consequences for this. If your future path involves seeking a merger or acquisition, recognise that, and start the process to ensure this is completed properly.

Forcasts and Planning 

Much of the above leads to one clear solution. Forecasting and Planning! Your firm will have the necessary data from its past to give an indication as to the future. You may not be able to predict the future but there is a lot of information from which you can base assumptions. You will be able to assess a realistic best case scenario and a realistic worst case scenario. In between you may find the reality. Whichever path the future holds, one of them will be right. The path will not be an overnight change and it will take time. With effective planning your firm will be able to quickly establish which path you are heading down and through that, enable you to take the appropriate action as you would have planned for it.

Firms and their owners should consider these issues and identify if any could impact on them and what that would look like, and importantly, how they can be addressed to minimise or remove the risks.

Action 

The future does not have to be uncertain and understanding your firm and the potential future issues it may face, will aid in the action that can be taken now to prepare for any negative consequences of a full recession or to benefit from a stabilised and progressive market.

We all hope that the legal market will not suffer any further negative effects of the current crisis and that we have seen the worst. However, appreciating and preparing for a troubled future will deliver strong more adaptable firms, capable of weathering a down-turn. It is the safeguards and measures that are put in place now that will ensure firms stay in control of their own destiny and not face action which is forced upon them through poor financial or strategic planning.

How we can help 

At The Strategic Partner, we work with law firms to build short to long term plans, both financial and operational, to assist them in facing future challenges positively and in being prepared. For more information on the work we undertake you can speak to us directly by calling 0203 911 9710 email us info@thestrategicpartner.co.uk or visit our website to make an online enquiry.

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