The perils of medium-sized legal practice

From a Baker Tilly Tax & Accounting Ltd email circular comes this delicious list of 19 things to avoid -- in the unlikely event that you are working for one of the 200 or so medium-sized UK law practices that will somewhat alarmingly be one of the 50 to survive. It's fun to run through this list and see how many of them are as much a matter of concern to solo and small IP practices as they are to medium-sized ones, and how many are happily irrelevant.  Another reason why this list is a must-read is that many of the good folk whose jobs disappear when the 150 "failures" go under will become sole or small-scale practitioners in turn, providing us with more friends, competitors and blog readers ...

1.      Allowing too much working capital lock-up – work in progress not billed and debtors not collected in a timely fashion leads to increased working capital requirements. These requirements can be significantly reduced by active invoice management and regular credit control procedures;

2.      Loss of key work-winners without suitable replacements – in a very competitive market, client attrition leads to loss of turnover. For firms with a traditional high fixed cost base of property, people and insurance, reductions in turnover inevitably result in profit erosion;

3.      Ability to adapt and change cost base – if revenue continues to be under downward pressure, difficult decisions such as reducing staffing levels must be taken early. Prompt decisions help ensure that working capital is available to meet the often substantial costs of staff reduction programmes;

4.      Ability to adapt and change service offerings – a thorough review of the profitability and cash requirements of each service line should be undertaken. Management should understand the commercial rationale for persevering with loss-making departments. This rationale should be reviewed and challenged on a regular basis;

5.      Ability to adapt and change – delivery model - ability to innovate in the way services are delivered, moving from traditional models to more efficient process or project-driven, IT-enabled models;

6.      Ability to adapt and respond to opportunities – the ability to identify growth markets and utilise existing skills and people to service these opportunities as they develop, or ability to attract key new partners to develop new markets, is vital to long-term sustainable growth;

7.      Ineffective management team – a lack of defined leadership hampers the firm’s ability to create a defined strategic plan, to implement strategic plans and to develop growth and profitability;

8.      Lack of management information – a lack of regular, usable financial information, often evidenced by inappropriate WIP and debtor provisioning, can lead to poor financial decisions being taken;

9.      Difference between profits and cash – the lack of regular, usable financial information and the consequent failure to understand and highlight the difference between profit and cash can be very dangerous. Management teams driven by profit may not acknowledge future cash requirements and so may fail through unforeseen cash needs;

10.  Weak financial management – If the chief financial officer does not have the status or presence to command respect among equity partners, their sound financial advice and planning may be ignored in favour of alternative strategies which cannot be funded;

11.  Property transactions – responding to the short-term attractiveness of rent-free periods and rentalised fit-out costs of new property transactions without the detailed analysis of the profit and cash effects on the firm in subsequent years can lead to significant cash difficulties;

12.  Excessive drawings – allowing partners to continue to take drawings in excess of the profits earned or the cash available in the partnership will quickly lead to financial difficulties;

13.  Communication – limited levels of communication from the management team to all partners about strategy and financial results will lead to disinterested and demotivated partners not all pulling in the same direction. This may lead to counter-intuitive actions being undertaken by partners or partners becoming disillusioned and leaving unnecessarily;

14.  All profits drawn as remuneration – leaving little or no reserves within the partnership means the firm has no ability to ride out the consequences of unexpected rainy days;

15.  Merge in haste, repent at leisure – a poor choice of merger partners can turn a successful small firm into a large firm struggling for working capital and unable to pay the necessary restructuring costs leading to a downward spiral of performance;

16.  Merger not adequately controlled – without strong leadership and control of the merger process, a perfect strategic merger can lead to painful periods of firefighting to keep the larger firm afloat and lead to the loss of key work winners;

17.  Poor post-merger integration – firms often over-estimate the synergies achievable, and underestimate the time it will take, the complexity and ultimately the cost of integration;

18.  Poor communication with and management of outside stakeholders – failure to manage key stakeholders such as the firm’s bankers and the SRA can lead to key decisions being enforced by parties outside of the firm. This obviously may not be in the best interests of the firm. Maintaining strong relationships with outside stakeholders and presenting unified workable plans gives firms a greater chance to control their own destiny;

19.  High levels of debt - when interest rates eventually rise, firms with high levels of debt will see increased interest and finance charges. This erodes profits and limits cash available to be drawn as remuneration.