A major study by management consultants PwC painted a fairly bleak and uninspiring picture of the financial performance of legal firms during 2016.
Whilst commercial opportunities appear to there for ambitious and expanding law firms, an apparent lack of working capital – whether by way of equity investment, secured loans or unsecured fixed rate loans – seems to be holding many back from achieving better economic and financial performance.
Findings
The environment for the provision of legal services is growing steadily more competitive – in no small part due to the entry of new competitors and the growth of fixed or contingency fee arrangements. In a fast changing world, the law firm of today is unlikely to bear much resemblance to the law firm of tomorrow, says PwC.
Keeping abreast with those inevitable changes is likely to require investment, the ready availability of working capital and the ability to arrange efficient and cost-effective loans as and when the need arises.
Although firms across the board (75%) appear to have increased their fees and charges in response to these changes, that has not translated into any general increase in profitability in most cases.
Indeed, net profit margins have deteriorated during the past few years, says PwC, and falling profits have been largely the result of higher staff costs, increases in basic salaries or higher headcount.
Needs
Many law firms are cottoning on to the potential benefits of digital technology in all its forms – from social media to analytical functions, from use of the cloud to mobile applications – and the use of this technology seems to be widely recognised as adding value to the client’s experience.
Even so, only a small number of firms appear to be using mobile applications or their own website to improve communications or to share information with their clients.
IT opportunities appear to be there, but few legal firms are make the best use of them.
Given that staff costs account for nearly 70% of the average firm’s operating expenses, it is not surprising that management of human resources is one of the prime candidates for enhanced use of digitalisation.
In pursuit of improved profitability, firms are also in the process of developing strategic expansion plans – and these, too, depend on improvements to the IT infrastructure of most firms. The principal stumbling block to the realisation of such plans is probably a lack of funding and the need to discover better ways of managing working capital.
This, in turn, raised the question of the sources of funding available to firms of solicitors and their effective use of the opportunities.
Funding and working capital
Despite an apparent need for flexibility and a more imaginative approach to funding, many firms continue tried and tested paths.
One of the principal sources of funding given by respondents to PwC, for example, was cited as retained capital – from current or retired partners. Except among the leading legal firms, however, bank loans do not appear to feature quite so prominently as in the past – perhaps reflecting the banks own reining back on lending policies.
So where does that leave today’s solicitors’ practice which is keen to keep abreast of developments, manage its working capital, and raise the extra funding it needs from time to time?
Secured loans
- the practice may already have raised a major secured loan, in the form of a mortgage, for the purchase of the firm’s premises. Even if the latter are leased, secured loans may have been arranged to finance setup or relocation costs;
- these are necessarily long-term loans, with repayments spread over many years, the accumulation of appreciable sums in interest, and the risk of whatever assets were used to secure such funding;
Unsecured fixed rate loans
- many of the needs of the legal practice, however, may be met by much shorter-term borrowing, in the form of loans for solicitors – where repayments may typically be made over three months or up to 5 years;
- although repayment terms may be relatively short-term, specialists in lending to professions such as your own may give you the option of choosing any sum you care to name – from as little as £5,000 right up to £1 million;
- this may the way of raising the working capital you need, without a long-term commitment to repayments over many years or the accumulated interest that goes with it;
- It may prove the ideal way, therefore, of raising the funding you need for investment in IT systems, relocation of your offices or even the acquisition of rival practices.
Unsecured fixed rate borrowing for solicitors, therefore, may give you the wherewithal not only to keep up to date with the fast changing environment of legal services, but help to restore the profitability which your practice deserves.