Hot topics in financial management

As summer draws to a close, Claire Hafner, David McLaughlin, Chris Bull and Michael Roch take a reflective look at the hot topics of the past year and, as a possible recession looms, give their predictions for the year ahead. By Joanna Lee.

What a year it has been. What started out as troubled times across the Atlantic surfaced in the UK with the collapse of Northern Rock this time last year, and law firms watched the drama in the markets unfold in anticipation of their half-yearly results. The mood was optimistic, particularly for those with an international presence, and the results did not disappoint.

In October 2007 we saw the Legal Services Bill receive Royal Assent and a new chapter begin for law firms, with some quick off the starting blocks with initiatives in anticipation of 2011. Yet this chapter has also heralded a new breed of competition, in what is already a heavily competitive environment.

As we watched events unfold in 2008, it seemed that law firms were being spared the immediate effects of the downturn in the markets, certainly in terms of their results: some wondered how far into a downturn we would actually slide. Behind the scenes, however, redundancies were already in progress and rumours of a possible recession began. In June, the yearly results started coming in, and we saw impressive turnover and PEP figures from most of the top international firms: some even scored record profits. However, many of these results for the most part reflected profits generated in 2007. We saw firms that were reliant on the domestic market, or whose financial year caught more ‘credit-crunch months’, disclose some not-so-impressive results. Fears are now growing for what this year’s half-year figures will reveal.

Financial management has never played such an important role in a law firm’s survival as now. Redundancies are being spoken about with an increasing frequency, as is an impending recession, and we see firms increasing their presence abroad, in particular the Middle East and the Far East, to try and mitigate the markets. A tougher economic climate for both firms and their clients means that having the competitive edge is crucial, as is adapting oneself to the market and having one’s priorities in order. Coupled with the advent of the Legal Services Act, 2008/9 promises to be a year which will clearly demonstrate those firms whose houses are in order, and those that are not.

With that in mind, FD Legal called on the expertise of some of our editorial board to give a personal perspective on the hot topics that dominated financial management over the past financial year, the biggest hurdle faced and their predictions for the year to come.

Claire Hafner - Finance director, Eversheds

Which hot topics dominated financial management at Eversheds over the past financial year?

“On the matters which dominated the past financial year, it has been working on delivering a better and more efficient service to our clients, in particular our global clients. This is set to continue this year as the demand for a transparent and seamless service accelerates. We have also looked at sector growth and profitability, at London growth and international expansion. On this year’s focus, more of the same with the added twist that we need to focus even more on our efficiency drives across the business.”

Which hot topics do you predict for the financial year ahead?

“Global account management, efficiency drive, improved resource management and more targeted client and sector focus.”

David McLaughlin - Finance director, Simmons & Simmons

Which hot topics dominated financial management at Simmons & Simmons over the past financial year?

“The primary objective was to continue improving the profitability of the firm and in that respect the actions taken by management were successful with a healthy improvement in profitability during the year: income was up 15 per cent during the year, but profits rose by 20 per cent and PEP by 22 per cent. This also reflected a very impressive performance in the medium term, which has seen profits per partner increase by 155 per cent since the turn of the century. This involved a combination of actions on income, the cost base and the management of equity – seen more as a process than one-off reactions. In that respect I would echo the comments made by our managing partner, Mark Dawkins, in that the firm has concentrated on growing the bottom line, rather than chasing income growth.

Managing through the start of the credit crunch made the challenge that much harder, but in essence it meant that management needed to maintain the focus and remain firmly committed to the actions requiring implementation.

The extreme movements in the exchange rate between sterling and the euro gave rise to some interesting challenges, both for the firm and for individual partners. In respect of the former, the firm had in place certain hedges, which provide for certainty and remove much of the risk associated with exchange rate fluctuations. For partners, the position is more complicated as each individual has different needs.”

Which hot topics do you predict for the financial year ahead?

“The level of uncertainty caused by the credit crunch and talk of recession gives rise to concern. The spread of the firm’s activity (across different disciplines and jurisdictions) means that there is an inherent hedge in terms of economic cycles: some areas and some countries are busier than others. The important issue is that management has the right objective and the appropriate management tools at its disposal to understand rapidly, and with confidence, what is happening across the firm and then to enable the correct decisions to be made. In that respect, the firm’s investment in its management information systems is paying rewards.

Cash will clearly be a major concern for all businesses and the firm will continue to manage its lock-up effectively whilst dealing fairly with suppliers.

Finally, the firm is currently reviewing whether it should convert to LLP and, if this were to proceed, the finance function would be heavily involved in the project.”

Chris Bull - Chief operating officer, Osborne Clarke

Which hot topics dominated financial management at Osborne Clarke over the past financial year?

“Since the credit crunch in summer 2007, the financial preoccupation has been trying to second guess the economy, the legal market’s response and how both will affect the firm specifically. Investment and budgeting decisions were suddenly made more difficult as we faced a period when the only certainty was uncertainty.

In fairness, the continued buoyancy of the transactional market made for an exceptional financial year and the temptation was to keep spending, recruiting and growing at mid-decade levels. But we took a route which tempered forward momentum with caution from relatively early on in 2007/8. A resulting challenge was all around communication: how do you ensure that stakeholders, partners, budget-holding managers and marketing teams really understand the reason for that caution against the background of an emerging record financial year?”

Which hot topics do you predict for the financial year ahead?

“More of the same for next year in one sense but with a crucial difference, sadly. We now know that we’re in for a sustained period of downturn, maybe recession. The impact on the legal world is now being keenly felt. The most interesting and important factor in financial management approaches for 2008/9 will be the very different degrees to which various firms are affected - degree of exposure to the property market, mitigating impact of growth in global markets (especially the BRIC countries and the Middle East), reliance on discretionary spending by the banks, proportion of contentious work etc.

Cutting back on expenditure and investment - in people, space, technology, marketing - is inevitable, relatively easy and already in full-swing in most firms. Less straightforward, but even more important for FDs to focus on, are finding ways to increase, or at least protect, market share, wrapping your arms around your best clients (at least equally troubled in these times) and ensuring revenue control is watertight.”

Michael Roch - Partner, Kerma Partners

Which hot topics dominated financial management at Kerma Partners over the past financial year?

“The declining dollar, making changes in our service offering in anticipation for the economic downturn, and implementing an integrated, global financial structure. While a majority of our revenues come from the United States, our revenues are reasonably well diversified across the dollar, sterling and the euro. As a firm that distributes only a portion of its profits, we have faced less internal partner bickering around exchange-rate impacts on performance than some of our clients with global profit pools.

We have adjusted our service offering a little to help our clients through the downturn. Revenue replacement, reviewing strategic assumptions in light of different economic conditions, performance management and improving the cash collection cycle all are timely topics.

Our small pool of 25 professionals serves clients in North and South America, UK, Continental Europe and Asia from three principal offices (London, New York and Toronto). This means requirements for consolidated performance analytics for several local operating companies in a multi-currency and multi-tax jurisdiction environment. Intellectually, this isn’t that difficult to accomplish, but these requirements are difficult to implement in a cost-effective way for a small organisation such as ours. We outsource all areas that are not core to our consulting and research work (for example, document finishing, IT, public relations), and this includes our accounting. We now achieved consolidated performance analytics and reporting by customising Twinfields (a web-based accounting

solution from the Netherlands that is used by some of the international accounting firms for their client work) and by integrating our outsourced accounting service providers with that technology.”

Which hot topics do you predict for the financial year ahead?

“Growth, surviving the downturn, and the Legal Services Act.

Internally, our main focus will continue to revolve around growing our base of senior advisors in the right locations and around areas of expertise that will be in demand in the short- and long-term (for example, talent management, diversity, finance).

As to our clients, many professional services firms will have to find ways to either reduce capacity or shift capacity to in-demand areas or locations – not easy to do given the intellectual nature of doing the work and the relationship basis of getting the work. The economic downturn also will have some of the stronger firms preying on their weaker competitors – either by taking them up as a whole or by acquiring unsatisfied, profitable teams: a good number of UK Top 200 firms will not be around to report on 2009/10.

UK firms will increasingly be looking at the Legal Services Act and how its full implementation – in particular alternative business structures – will affect their business and that of their competitors. Some leading firms are beginning to build a detailed analysis around this into their strategic-planning process this year.”