Surviving a storm

The words of the popular Billy Ocean song seem particularly apt right now: “When the going gets tough, the tough get going”. Just as we all hoped that the worst effects of the coronavirus (COVID-19) pandemic were behind us, a new lengthy set of challenges have presented themselves, like war in Ukraine and a cost-of-living crisis. What, therefore, are the key areas that managers of legal businesses should be considering to mitigate these risks?

Combating inflation and maintaining profit margins

It may be difficult to maintain planned organic growth trajectories within firms over the next few years, with higher costs of salaries and things, such as energy and professional indemnity insurance (PII). Adequate repricing of services will be necessary to maintain or grow the bottom line.

These factors may suppress demand for legal services from both businesses and consumers, with economic growth rates unlikely to return to previous levels until after the predicted two-year recession. It might be tempting to maintain, or even reduce, pricing to gain market share, but that could be more problematic in the longer term, and firms should stay robust on pricing and brave enough to increase their fees in line with specific inflationary pressures. Otherwise, the bottom line will suffer, either by standing still or reducing in real terms. 

Maintaining recovery rates and seeking out efficiencies in operational processes will also help protect or grow the bottom line. Process reviews are something that we have carried out with many firms. There may be some easy wins around the use of existing technology or the introduction of new software that could improve efficiencies, as well as produce better management information for business decision-making.

Reviewing travel and marketing spend, to weed out unnecessary or low-return expenditures, will also help to protect the bottom line. Many firms will have made some permanent changes to such areas of spending during the pandemic, including utilising Microsoft Teams and/or Zoom for meetings, where previously the cost of travel, as well as the time incurred in that travel, were lost.

Potential cost savings

A detailed line-by-line review of the firm’s direct costs and overheads may lead to some cost-saving initiatives that could be relatively easy to implement. If there is any ‘fat’ within those costs, then this is the ideal time to start trimming that away without of course cutting into the necessary ‘muscle’ which underpins the effective and efficient running of the firm. This could include:

• Increasing the number of trainees taken on, to re-balance how the work is done and improve the salary cost to fees ratio. Good training and career development of those trainees can also future proof the staff resources in the business through mutually beneficial retention.
• Printing and postage costs should be reviewed as more use of email and electronic document signatures should be preventing the need for the printing and sending of paper documents. Internal policies should be applied around printing needs, encouraging printing on both sides of the paper and specifically limiting colour printing which is substantially more expensive.
• Consider reducing the number of office locations or looking at more cost-effective alternatives.
• Centralising as many internal functions as possible to achieve economies of scale.
• Consider outsourcing some internal functions to achieve cost savings, as well as taking admin responsibilities away from fee-earners.
• Some degree of hybrid working and hot desking may allow the firm to reduce the overall footprint of offices, or if expanding, prevent an immediate need to move to larger premises.
• Consider a new range of key performance indicators that may be more geared to cost control and encouraging cost savings.

Careful cost control, combined with appropriate pricing for services, will go a long way to protecting the real terms value of the bottom line even if growth proves difficult in the next two years. A good financial and management information system, producing prompt and accurate financial reporting, is vital as a monitoring and early warning system. If this is difficult within the structure of your firm, consider outsourcing that function.

Diversifying income streams

Reliance on just a few key service lines, or a few large clients, could prove problematic over the next two years. Consider expanding the range of services you provide and moving closer to a full-service offering that may make you more attractive to a broader range of clients – or even up-selling to existing clients.

It may also be possible to balance income streams by offering a mix of services that are counter-cyclical, leading to more profitable opportunities and smoother cash flow throughout the year.

Profitable top-line growth may prove to be challenging over the next two years, but anything achieved should flow to the bottom line.

Addressing unprofitable income streams

You may be offering some services that are running at a loss. The obvious answer would be to charge more commercially for that work, but that may not be possible. The departmental profitability may be because the staff engaged in that department are just not busy enough, or simply that historic work methodology is now outdated and the work process could be done differently or by using trained but lower grades of staff, while diverting more experienced or skilled staff to more profitable work. Ask yourself whether that problematic workstream be outsourced or referred to other firms in return for more lucrative return referrals.

Cash is king

It may be a cliché, but in addition to protecting profit margins, including control of key costs, it has become even more important to maintain a higher level of cash resources, so as to have a suitable contingency fund. There will be some bumps in the road for us all over the coming years and with the rising costs of borrowing, an adequate working capital reserve is essential.

This could be achieved by partners or directors retaining more of the profits in the business for a temporary period to boost cash reserves. There may also be an opportunity to improve the lock up within the firm, for example by billing more regularly / promptly and by strengthening credit terms and credit control processes. This is critical to monitor especially if clients seem to be taking longer to pay than previously.

Cashflow forecasting on a rolling 12-week basis will be an essential tool in monitoring the adequacy of cash reserves and measuring against the annual cashflow targets. Some contingency planning based on some adverse sensitivities or ‘stress testing’ is also useful to predict worst case scenarios.

Firms that are planning to expand or are seeing increasing levels of business should be careful about growing too quickly. Often referred to as ‘over trading’, a sudden burst of growth may put significant pressure on existing working capital facilities, as well as putting additional pressure on existing teams if recruitment cannot be achieved quickly enough.

Your culture – staff retention and recruitment 

The current trend when it comes to salaries is unsustainable for most firms, however, the positive news is that existing staff, as well as potential candidates, for the most part, are not purely driven by money. Instead, they want to know more about who you are and what you do, so they can make a fair assessment of whether the fit is right. This should put culture as the single most important aspect of any recruitment strategy.

Getting your culture right can also help with retention; high numbers of employees in professional services firms score things like flexibility and progression as more valuable to them than salary. This is not to say that salary is unimportant, as it most certainly is, however getting culture right is proving to be far more impactful with people.

Once you have the right culture in place, think about how you can best demonstrate that culture to people outside the organisation. As an example, when you choose to interview a candidate, we would encourage you to invite that person into the office as opposed to using Microsoft Teams or Zoom as default. As we all know, candidates and businesses alike have become used to conducting interviews virtually, mainly as it is seen as a more convenient way to meet someone. For a candidate this is almost certainly true, however, it is also far more difficult to get a feel for a firm’s culture virtually. Where candidates can’t come into the office to interview, invite them in for a tour so they can get a real feel for the place.

Think about the make-up of your interview panels as well.  Are the people talking to candidates the best cultural representatives of your firm and are they clear on what the culture of your firm is?

Make sure that you also reference your culture in the conversation with candidates, and that the message is consistent. This above all else will help you differentiate from your competitors, which in turn will help you recruit the right people for your firm.

In summary

The circumstances for every firm will be different in planning for the next few years, and the economic downturn may present opportunities for some. In previous recessions, it is clear that the ‘survival of the fittest’ has proved true. Planning is vital now to ensure that your firm is in good shape to take those opportunities when, as it will, the economic recovery builds momentum