Blog - Management speak

Burying your head in the sand could lead to disaster

Citadel Law's Lesley Graves looks at a recent report from the SRA and what law firms need to do to maintain their 'client first' focus.

The ostrich approach Alfaspirit

The Solicitor’s Regulation Authority (SRA) recently issued a report detailing how law firms who neglect their financial commitments and take uneducated risks in purchasing work from failing firms, are causing a great deal of damage to their clients and the reputation of the legal sector as a whole.

The SRA’s Steering the Course study uncovered a clear correlation between financial instability and the misuse of client monies, with evidence of misuse or misappropriation of client monies found in more than a quarter of those firms studied. The report proves recent failures in the legal sector caused by poor financial management, such as those we have witnessed in the UK with firms like Barnetts and Linder Myers. These could, however, simply be the tip of the iceberg, if those firms employing risky business strategies at the expense of their clients don’t change their tactics.

It’s almost a year since the Jackson reforms shook up our legal sector and we’re now starting to see which firms have been ignorant to the necessity of evolution. Law firms of all sizes need to start realising that burying their heads in the sand, when faced with a challenge, is not suitable for today’s legal market. The same can be said the world over. Whilst we are witnessing first hand irresponsible business decisions and the consequential fall out, to the firms I work with, my advice includes:

• Ensure transparency of finances to all partners to avoid autocratic mangement
• Drawings should not exceed net profits and should be linked to cash collection targets
• Ensuring sufficiently retained capital to pat debts; particularly tax
• Controlling interim and final billing for work carried out
• Cash flow forecasting that is robust under independent scrutiny
• Profit from work regularly tested and any found to be unprofitable is dropped
• Expert due diligence on any new lines of work or WIP/law firm acquisitions
• Cultural and business alignment in any such acquisitions is crucial
• Post acquisition integration is key to any M&A project

These points echo the advice of the SRA and while aimed at law firms in the UK, it has elements that legal markets across the world can learn from. The SRA’s Steering the Course study provides invaluable insight into the problems leading to financial and regulatory risk and potential solutions. It illustrates that the sooner firms actively face their issues and engage in a strategy to work through them the better.

At the heart of all of those in the business of law must be client focus – providing expert and commercial advice with an enterprise wide approach to risk management and financial stabilty. Without the client there is no business.

Law firms in England and Wales are still navigating uncharted waters. By paying attention to the steer from SRA reports like this, law firms, banks and accountants can adapt in this unprecedented and pressurised climate.

The SRA’s Steering the Course study can be viewed here:

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29 April 2014

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