The legal sector continues to face many challenges to its traditional methods and practices. For small law firms, recognising these challenges, and seeking advice and making plans to address them, is critical to their future survival and success. Rosy Rourke lists the top considerations at the moment for anyone running a small law firm.

1. Cashflow and lock-up management

rosy rourke

Cashflow issues can affect law firms of all sizes, smaller firms in particular, as they do not necessarily have the breadth of resources to call upon when there is not enough cash to pay the bills or wages. The latest data from Armstrong Watson’s benchmarking survey (November 2017) suggest that the average lock-up in law firms is 187 days (ie it takes 187 days from when work starts to the cash being received).

We recommend that every firm, no matter how small, should prepare a cashflow forecast for a minimum of 12 months ahead, based on reliable income forecasts, to assess if any serious cashflow problems are likely to occur. Small firms should also prepare a 13-week rolling cashflow forecast to identify any short-term ‘pinch points’. This will allow you to take any appropriate steps as soon as possible to mitigate any potential issues: for example, tightening controls on costs; implementing more robust credit control procedures to ensure your clients stay within your payment terms; or more efficient and timely client billing. Sourcing additional funding solutions or re-financing could also be considered.

For more information, see Andy Preece’s previous article for the Small Firms Division covering seven funding options your law firm could consider.

2. Succession planning

In some ways, succession planning is the single largest issue for a small law firm. Succession planning is too great a subject to cover thoroughly here, but the main point to mention is that – worryingly – many firms have no strategy or plan at all in this area.

It is vital to be proactive about the retirement of senior people, to ensure the future success of the firm (and for the exiting partner to realise their investment within the firm, including the repayment of capital accounts).  

The main two succession options are a sale or merger, or internal succession. Neither can be done overnight. With internal succession, potential partners need to be identified at an early stage, and be prepared for the role over a period of time, to ensure they both want, and are ready, for the challenge ahead of them. Similarly, with a sale / merger, the whole firm should be ‘groomed’ for sale, to make it as attractive as possible to potential purchasers and realise its maximum value. 

3. People recruitment

People are the biggest asset to any small law firm, but can also be the cause of many issues.

The recruitment of staff who are a correct fit with a firm’s culture and future plans is vital, but in many small firms, simply recruiting staff at all is very hard to do, particularly in general law practices away from the larger conurbations.

The demands of today’s workforce have changed, and you may need to consider flexible and remote working as well as attractive benefit packages in order to attract and retain the right people. Flexible working can and does work if implemented correctly, but it is important that staff and client expectations are managed as part of the process.

4. Productivity and people management

The majority of fee-earners will say that they are busy working for most of their time on client matters. However, from the Armstrong Watson benchmarking report, we’ve identified that the average number of chargeable hours for fee-earners is in fact falling. The most recent data suggests that average chargeable hours per annum is 826, which equates to only 3.5 chargeable hours per working day.

Productivity issues can often be linked to a firm’s culture. For a small law firm, even if resource and management information is available to actively support fee-earners, changing the culture to ensure the correct recording of all time spent on client work, and ensuring each fee-earner is performing the correct level of work for their role, is a bigger challenge.

5. New forms of delivery of legal service

For many small, traditional high street law firms, the competition has changed. The new alternative business structures introduced a number of years ago have not yet necessarily had the impact that was expected, but remote and online legal services have dented target markets, as clients seek legal assistance from non-lawyer professionals and legal self-help websites, at reduced fee levels.

Smaller, traditional law firms struggle to compete on price, meaning that the personal service you offer clients must differentiate your firm from these cheaper and more easily accessible options.

6. Demanding clients

Legal consumers have become increasingly sophisticated, and now expect more flexible and accessible methods of service. It is inevitable that with the availability of email and the rise of instant messaging, clients demand far more regular communication. As such, each piece of work inevitably takes more time as clients are constantly kept informed. Small firms need to be transparent, both with their pricing and in setting client expectations, to ensure that the client knows what level of service to expect for the price they are willing to pay.

7. Increasing use of technology

Wasting time on administrative tasks can cost significant time and money. The correct technology can make processes more efficient, and therefore deliver higher profits for a firm.

For a smaller firm, the right technology is likely to represent a significant investment, and with such an array of software packages available, choosing the right one is vital. Time should be spent researching and choosing tech carefully; product demonstrations will be very helpful here. It is also important to ensure that the product you choose is suitable for your size of firm, as the investment may be wasted if your requirements are far less sophisticated than what the package offers.

8. Legal and regulatory change

The demise of legal aid has had, and still is having, a significant impact on many law firms. The reforms brought in by LASPO have removed whole areas of practice from scope, including family, immigration and housing, as well as cutting fees for the work that remains. The impact on small firms has been a significant decrease in the work available in these areas, and additional pressure on fee levels and the profitability of the work that is still there.

If legal aid work forms, or did form, a large part of your fee income as a small firm, you will need to ensure that this work type remains profitable, through effective cost management.

9. Cybersecurity

Small law firms tend not to pay enough attention to cybersecurity. Although this may not be viewed as a problem by those firms, should something go wrong, it will soon become a very big issue.

Inevitably, too much time is spent on other pressing issues, such as winning new work and collecting cash. However, there is an ever-increasing threat from ransomware, phishing and other cybercrime, and criminals are aware that small law firms are easy targets. The likely cost of an attack would be enough to result in many small law firms going out of business.

To mitigate the risk, firms should at least ensure that their protection software is up to date, all staff are trained on the risks and that adequate data back-up processes are implemented.

Rosy Rourke is a legal sector director at top 30 UK accounting firm, Armstrong Watson LLP. Rosy works exclusively in the legal sector advising law firms throughout the UK on strategic, structural and other business improvement issues as well as providing efficient accounting, tax and SRA accounts rules services. Further information can be found at www.armstrongwatson.co.uk/legalsector

This article is a general guide to the issues that we see in practice. It is not a substitute for professional advice which takes account of your personal circumstances. No responsibility can be accepted for any loss occasioned by any person acting or refraining from action on the basis of this article.

The Law Society has exclusively endorsed Armstrong Watson LLP for the provision of accountancy services to law firms throughout the whole of the north of England.