Legal Insight – Q&A with Sara Hutton: The future financial landscape

Welcome to the latest issue of Legal Insight, the PM+M legal newsletter. In this edition, the spotlight is firmly on Sara Hutton, an adviser with significant experience in the legal profession, working predominantly with professional practices.

In this article, PM+M partner Helen Clayton catches up with Sara to explore the future financial landscape of law firms. Find out Sara’s thoughts below: 

Helen: How do you see the financial future of law firms panning out?

Sara: In most cases, firms are in better financial shape than they expected when the pandemic started with government support, improved focus on working capital management and effective working with better technology solutions.

For the next 12-18 months, firms in a good financial position have the foundation to manage short term issues and the biggest question for them is what to do with any cash surplus – repay CBILS or other debt early or invest in the firm? I would not rush to repay either BBLs or CBILS – you’ll never get such good terms again – give real thought to investing in the business; it will earn a much better return on investment. If nothing else, use it to fund your next PII premiums as there will be significant interest cost savings.

If firms that entered the pandemic in a weak financial state have not addressed the causes of their financial position, their situation will worsen once more, with increased drains on cash, to service additional debt taken on and deferred tax payments. They are also likely to be faced by higher PII premiums again.

Inevitably, and we’re already seeing the first signs of this, there will be more mergers and acquisitions as well as business closures.

Beyond the next year or so, the pressure on pricing will intensify driving investment in systems and process and there will be an increasing gap between financially strong/well run firms and the rest. This will drive the market consolidation that has been predicted for the last 15 years. As we all know the market has been evolving since the Legal Services Act 2007, the momentum was increasing pre Covid and is expected to continue with the growing presence of new business models and entrants challenging the status quo.

One critical success factor will be how firms use what they have learnt, the improvements they’ve made and the cash they now must invest in the future success of the firm. I’ve seen more owners taking stock of their personal and firm’s situation, having quality discussions and agreeing clear strategic plans for their business. These plans are for 3 to 5 years and are well thought out and shared within the business.

These firms have the focus and momentum to:

  • accelerate business improvement
  • use cash to invest in tech/business information systems to drive efficiency and improved financial information
  • actively consider merger or acquisition
  • plan and implement ownership/structural changes.
  • invest in business development and marketing

For such firms, the outcomes will include:

  • great service to clients improving client retention and the ability to increasing pricing
  • growth in new clients or work types
  • improvement in profits
  • improved cash levels

All of this can drive further investment in growth or fund ownership changes or reduce dependence on external debt.

For the firms that have struggled where owners continue to just about keep the doors open, they need the support of advisors and the people around them to exit stage left – now is not the time to prevaricate – the market is unlikely to get any easier.

Helen: It’s disappointing that it’s taken a pandemic to trigger strategic discussions and planning. I entirely agree though that this will mark the difference between a firm that thrives, a firm that survives and the rest. Being in denial or continuing ‘as is’, is not going to drive success. The two C’s – Culture and Cash – will see firms succeed through attracting and retaining the right people and clients, effective investment in technology including AI, and effective and motivating and rewarding ways of working. In my last newsletter, I included an article on culture and values post-Covid and this retains its significance here.

To read the next article in our discussion series with Sara, where we ask ‘what do you see as the biggest hurdles for law firms?’, click here.

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Helen Clayton
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