With about £1 billion of unsecured debt among law firms, banks are adopting a tougher stance on lending to the profession. Steve Billot and Viv Williams look at how to ensure your firm is viewed as a winner


As changes imposed by the Legal Services Act and the Carter Review take effect, it is forecast that as many as 4,000 law firms could disappear.



Given the anticipated impact on cashflow, question marks over the ability of many law firms to understand their working capital cycle, and unsecured borrowings within the profession exceeding £1 billion, leading banks are taking a much harder line on law firm overdrafts and reviewing poorly run practices.



While still keen to lend to the ‘right’ firms, these banks recognise that the changing market requires more sophisticated lending decisions. Some have specialist teams which benchmark firms against each other both to identify the winners whom they will back, and more importantly to spot the losers whom they will not.



So what are the key issues causing concern among the banking fraternity?



First, there are the ‘hobbyist’ law firms. These are practices whose partners enjoy their status, but who have no real practice management in place. There is no room in the new tougher world of lending for those who place reputation before remuneration.



Likewise, many law firms have yet to grasp how ‘clients’ have become ‘customers’, a change that has already blown through the banking, accounting and other service sectors.



Traditionally, firms in these sectors enjoyed relationships with clients who valued their skills and paid appropriately. However, since the early 1990s the customer is king – those hard-nosed consumers who demand quality service, delivered on time and whose main driver is price. Traditional clients did not shop around. Customers most certainly do.



Financial management and planning is a major concern, especially limited understanding of ‘lock-up’. Law firms buy and sell hours, yet many still do not employ strategies to monitor work in progress and control debtors, leading to many thousands of pounds being tied up – either waiting to be invoiced or waiting to be paid – for long periods.



Add to this equation the facts that: a great deal of time is under-recorded; most law firms do not incentivise their staff to charge out all of their time; work is often not billed at the time of completion; work in progress is seldom recorded; financial ‘stress points’ are rarely predicted; and it is easy to see why law firms are consistently drawing more than the cash they are generating.



Banks are now demanding a more professional approach from law firms. Although the legal firm is not an endangered species, the general view is that it must evolve and adapt to the new commercial world as other service providers have done.



While concerns over solvency are putting law firms under the microscope, increased compliance is also an issue. The Solicitors Regulation Authority – through the new Code of Conduct which came into effect on 1 July – will be looking carefully at how law firms are run as businesses so that it can monitor early warning signs and act publicly to reprimand delinquent solicitors.



So what can be done to help law firms during these challenging times?



First, we have to accept that changes to the profession are inevitable – and accepting these changes means moving with the times. For example, we are seeing a significant growth in ‘virtual’ practices, with law firms using the Internet rather than conventional offices to gain competitive advantage.



It is not only the ‘Y generation’ that goes online to choose its lawyer – many octogenarians have email accounts and ‘grey surfers’ have leisure time to search the Internet. What impact will this have on the traditional high street practice that does not even have a website, let alone one that is up-to-date?



The growth of packaged legal services is also becoming far more commonplace. These major on delivering a proactive service to attract clients, rather than waiting for customers to come along when the need arises.



Well-run, financially aware firms and strong niche players will gain from these changes. There will be many opportunities to merge, which, if properly planned, will benefit all parties.



In the meantime, it is essential for the management of law firms to keep a firm grip on the key issues in order to remain a player.



A clearly defined strategy is needed with buy-in from all partners. Partners should be aligned in their objectives and motivated to implement the firm’s strategic plan.



Staff should be well looked after as the source of your competitive advantage, but within a culture of performance.



A tight control on cashflow is critical, as is an understanding of the working capital cycle and the ability to plan and prepare for the financial highs and lows that lie ahead.



An effective marketing strategy is needed to differentiate your firm and ensure all members of staff are able to cross-sell services effectively, while investments in IT systems and processes must be made cost-efficient.



Never forget risk-management issues. One badly done job will be remembered, no matter how many good ones you do.



Finally, plan for succession. While you must always look for the next generation of fee-earners and partners, do not forget to plan for future management and leadership.



Partners in law firms have a lot of thinking to do as they face up to what will probably be the greatest change in their working lifetimes. Perhaps now is the time to start seriously thinking about those New Year’s resolutions.



Steve Billot is a director of BDO Stoy Hayward and as an insolvency practitioner has carried out more than 500 independent business reviews. Viv Williams is managing partner of the 2020 Lawyers Group and a leading consultant to law firms