Current factors  affecting financial planning in the  legal sector

By Robert Millard

The key factor driving financial planning in the legal sector this year is uncertainty. Foremost is uncertainty about credit, and, following on from that, working capital funding and cash flow. Clients suffer the same uncertainties, and client creditworthiness is a rising concern. One law firm recently received a shining credit report on a client prior to accepting an engagement, only to receive an update less than a week later that, due to new circumstances, the client was no longer good for any credit at all. For many, performing any sort of credit check on a client is a new experience.

   With reported 2008 income levels of 15 per cent (plus) down on 2007, and worse still expected in 2009, another important issue for many is ‘rightsizing’ the firm’s business model to produce acceptable profit at those contracted levels.

   For some, the reality is that they are no longer viable under such circumstances. Realising this early on increases the chances of developing alternative strategies (such as mergers) or, at one extreme, winding down the firm while minimising risk.

   Firms are renegotiating everything from office rentals to compensation and service level agreements with vendors. Compensation freezes, or reduced working hours, are now quite commonplace. Discretionary spending has been cut to a minimum. Finding new and innovative ways of driving down the cost of serving clients without sacrificing quality is critical, with an obvious impact on financial planning.

   Opportunities exist in recessions too. Knowing which to decline is as important as knowing which to seize. Lateral hires, for example, come at a high cash-flow cost; generally the equivalent of six to 12 months gross cost of employment. Some firms have amassed war chests to fund these, but for others this is not a time when the risks are sensible. Critical to knowing which opportunities to seize, and which not to, is a clear view on what the market will be like once the recession recedes, and what the firm’s strategy will be in that future market. There is a real danger that, with the current focus on short-term survival, long-term strategy will be neglected.

   Counter-cyclically, however, some really proactive firms report that focused revenue enhancement strategies are bearing fruit as competitiveness in the market increases.

   The first half of 2009 is undoubtedly about short-term survival. From later in 2009 onwards, we expect strategic thinking and high-level financial planning to move at least partially back to medium- to long-term profitability.

Robert Millard is a partner at Edge International. He can be contacted at rob.millard@edge-international.com