Tough times ahead for Law Firms.

Most businesses are finding times tougher now than ever before and cash is tight compared to normal.  Some will freeze, making their decline almost inevitable; others will continue as before when they can and passively drift with an uncertain future, whereas some will adapt and prosper. 

Ossification of the economy since late March means businesses are more at risk of failure in 2020 than they were during the banking crisis of 2008/9. While liquidity may be adequate in business managing to continue operations to some extent or other, there is a huge risk that this is only sustainable because of government subsidies and once these are withdrawn, reality could bite very hard and very deep which will necessitate transformation very quickly.  Add to this PI renewals in October, deferral of VAT and partner tax payments to January 2021, and reduced lending appetite from traditional financiers to the professions and it looks like there could be cash shortages early into the new year if not before.

Against this backdrop, we have looked at evidence of behaviours and consequences we saw in previous recessions alongside what we are seeing and hearing today and make some predictions about how lawyers and law firms are likely to react in the coming months, in particular law firm viability and how individual partners may react to the shenanigans occurring around them.

Mergers, Sales, Departures and Closures.

Smaller businesses may struggle to find enough margin for adequate adjustment which brings their existence into question. Even though large firms have more staff to cut and more shareholders to shoulder the profit reduction, analysis of public accounts of the top 50 law firms in the UK shows there could be a cashflow crisis in many of those come September or October with a very real risk of collapse for several.  Very few professional services businesses are not in some degree of pain right now but the myriad ways of responding are what will define the economic landscape for professional services in 2021 and beyond. 

However, cashflow is not the only factor determining short term futures; the psychological impact on people must not be underestimated. The mental wellbeing of people in the professions has had a well-deserved focus in recent times but is in danger of being lost as the huge economic problems dominate the reasoning for business closures. 

Ennui promotes early retirement

During the last recession, we heard from many owners of small solvent law, accountancy and wealth management firms who highlighted a key motivator for wishing to sell up that was driven by recession despite their businesses being relatively healthy (considering).  Many people were experiencing a sense of the ennui associated with the prospect of recovering from another recession only to retire shortly thereafter.  Many owners just did not feel like they had the energy for the fight, and it is totally understandable. Hypothetically, if you were one of three partners aged between 60-65 and you already have a financial cushion adequate for your rest of life means, how much energy would you want to put into a business recovery that may take two years or more? This is the conundrum facing many right now and it will be unsurprising if hundreds of healthy small firms close their doors if they can find an orderly exit route.  

Partner and employee wellbeing will make or break your firm within the next 9 months

One of the under-reported outcomes during the previous recession was the number of partners and senior employees who chose to move firms for reasons beyond economic survival.  While Ortus Group worked with many people who wanted to move their client base to a firm with a more stable financial footing, we also worked with others who chose to join a firm that acted more honourably in its cost-cutting measures; many high performing partners and employees chose to leave firms on principle as well as by necessity. Being one of the lucky few who maintains a significant six-figure salary and profit share does not sit well with many who find themselves in a firm making major cuts to junior and support staff while equity partners do not shoulder their share of the hardship.  Continuing to work in such an environment can cause a mental wellbeing deficit for those people who feel conflicted about the approach of management and continuing to operate within an environment one may consider as toxic can cause adverse psychological effects. 

In addition, we are currently hearing numerous instances of partners feeling disconnected from the firm because, along with everyone else, they have had hours and salaries reduced to 3 or 4 day weeks but they are still working 6 or 7 days while others in less busy disciplines are barley doing half a day per week.  Add to this the reality that bonuses from last year are being cancelled despite smashing targets and there is a danger of rejection.  

If this issue gains traction in a partnership, there is a real danger that the floodgates open because big ticket departures can cause a similar effect to a run on a bank. A high-billing partner reaches the end of their tether and leaves with their team, removing valuable turnover as well as withdrawing their capital. This puts additional pressure on other partners to make up the turnover deficit and fund the capital deficit by replacing with their own cash or to increase borrowings. The next high-billing partner feels this is not an acceptable risk and decides to follow suit and before you know it, the problem grows exponentially larger before it is a desperate race to not be left ‘holding the baby’.  Consider that Ince & Co lost 45% of its partners in the 12 months before insolvency and KWM Mallesons had a similar problem that led to a very rapid demise for both firms.

Doing something constructive about it

As a result of this research and analysis, Ortus Group is launching a new service line which will be free to access for qualifying firms and individuals. Get in touch to have a confidential conversation about how we can help you quickly and without financial obligation.