Andrew Allen looks at how the debt profile of many law firms has changed since the start of the COVID-19 pandemic, how this has affected the…
Welcome to our legal sector newsletter which should provide something of interest to most law firm managing partners, finance management and COFAs.
We have articles on profit improvement, tax expense claims and financial planning help for partners along with an update on the new SRA accounts rules taking effect from November 2019 and the topical issue of cyber security. Our legal sector team has just completed a survey for a group of UK law firms and an interesting feature it identified was a change in the primary areas of future concern for firms. Amongst participants the focus, for the first time in five years, has shifted away from recruitment toward cash and process management. This is consistent with our own experience across the 2019 reporting season.
Process and productivity (or profit improvement) has taken a more prominent focus in many firms and we have seen investment of management time looking at factors such as time capture, matter process management, client management training for fee earners, revision of management information and KPI monitoring. All of these actions are designed to improve gross margin in firms.
Many law firms have also been reporting cash reductions. There have been many reasons for this including lower profitability, payment out of tax from more profitable prior years along with
current accounts and considerable investment in IT platforms. Cash reductions led firms to review their external debt and capital funding arrangements, as well as refocusing on lock up management which in our experience has slipped slightly in many firms in 2019.
At the same time, we have also seen headcount growth stabilise compared to recent years and recruitment fee expenditure decline except perhaps in a couple of areas, such as private client teams and certain areas of litigation. We would be very happy to review financial performance in your firm and help you improve your profit margins and PEP. In the meantime, some benchmarking headlines we have seen during the 2019 results season would include growth in earned income in firms of 3%-8% (2018 7%-12%) with typically half of this growth flowing through to increases in PEP. In many firms, as noted, cash has reduced and there have been slight reductions in partner numbers.
In terms of law firm activity our specialist legal sector team has been busy on a range of projects for law firms including mergers, re-financing, external investment, employee ownership models and incentive schemes. The financial outlook at present seems more sedate in law firms. The quarter and half year results in 2019/20 seem lack lustre in many firms we have seen. This combined with a hard PII renewal this year is placing pressure on firms. Hopefully this is a short term effect of economic turbulence.
The next 12 months are likely to need to require some very close financial management of people capacity in law firms and reacting quickly to trends is important for the long term financial
health of firms for all its stakeholders. Monitor matter starts, monitor time recorded, monitor recovery rates and take action where needed.
Finally our team are always here to provide you with guidance and support. We hope the articles in this edition are of interest to you and please do get in touch if we can help you in any way.