Midland law firms face failure if they don’t address key issues

LAW firms in the Midlands face financial problems if they fail to address key issues such as staff and salary levels, productivity and growth, a new report has suggested.

Grant Thornton’s benchmarking report concludes that while fee earners are generating more than they have over the past two years, firms could be heading for failure if they fail to take action.

The report analyses the published accounts of 24 firms either based in the Midlands or national firms with a significant presence locally.

Birmingham-based director Martin Ramsey, co-author of the report and a professional practices specialist, said: “Generally, 2010 saw a bounce back in profits compared to a very poor 2009, but this appears to be due to cost control and re-shaping rather than income growth.

“What is apparent is that on average, fee earners are generating more income per person than they were in 2008 and 2009, and most firms have cut back heavily on bonuses and pay increases.

“It appears firms are asking staff to do more for less and, while this can be effective as a short term measure, my concern is that it is unsustainable in the long run.”  

He said firms needed to ensure staff remained motivated and incentivised while costs were being controlled. Firms therefore needed to look closely at their remuneration strategies and consider tax effective reward structures and flexible benefits.

“These are not only attractive to both individuals and the firm, but also contribute to productivity, effectiveness and client satisfaction, which are absolutely essential to long term viability,” he added.

Mr Ramsey’s report also highlighted a reduction in staffing within the region’s legal sector between 2008 and 2010 of around 11.5%. In 15 of the larger legal firms in the Midlands this equated to a loss of 1,417 jobs.

“The hardest area hit was support staff. While fee earner numbers have stabilised and in some cases started to grow again, the numbers of support staff employed in the sector continued to decline – between 2008 and 2010 the reduction was a staggering 22.7%,” he said.

Cash management has been a focus for many firms and the report shows firms are continuing to put downward pressure on debtors.

He said although firms had continued to work hard to manage their working capital, they needed to focus much more on monthly billing in order to improve this further.

“There is still a huge bias in the sector towards quarterly and year-end billing, with anecdotal evidence suggesting that some firms bill up to 40% of the year’s fees in the final month of the financial year. Clearly this is not ideal,” said Mr Ramsey.

“Firms have also managed to control their levels of bank debt. Although we saw a spike in bank borrowing in 2009, this has now been reduced as a result of the re-shaping, working capital management and cost reduction.  In many cases partners have also been asked to contribute additional long term capital to the firm.

“What is vital is that partners continue to play close attention to financial management. It is all too easy for salary cost growth to creep ahead of fee income growth.”

He said it was therefore critical that financial decisions were closely scrutinised and supported by a strong business case.

“When times are tough, it can be tempting to take on ‘loss-leading’ work in order to attract longer-term, more profitable business but, given the changes taking place in the sector, this is unlikely to be a viable long-term strategy,” he said.