A survey of law firms: regulation and risk – the good the bad and the ugly

The inaugural Saffery Champness and ILFM law firm survey reveals a market that continues to show resilience despite economic and political uncertainty.

As well as an obvious focus on fee growth and working capital management, firms also recognise the importance of an effective and happy work force, as well as the challenges of balancing staff needs with those of the business.

Rather than focusing solely on the views of business owners, the survey gathers the thoughts of employees working day-to-day in financial compliance and support roles, as well as those of the partners and senior management.

Headline financial insights

• 2019 saw median fee growth of 6.7%
• 2019 saw median fees per partner of £696,000
• 2018 saw median fee growth of 8%
• 2018 saw median fees per partner of £643,000
• In 2019, average lockup days fell by 4 days to 172 days
• 2019 saw median fees per fee earner static at £135,000

Fees

The majority of participants reported year on year growth for both 2019 and 2018.

The median fees per partner increased in line with the total fee growth, while fees per total fee earner (including partners and employees) were relatively static year on year. This might be an indicator that firms are favouring an increase in fee earner headcount to service the rising demand, rather than focusing on increasing productivity of existing staff. It also suggests that firms are taking control of their partner/staff gearing and improving the balance at the top. In a well-run firm with careful financial monitoring and budgeting processes, this increase should convert directly into increased partner profits.

Lockup

Lockup days fell by four days across our participants, though there is still clearly work to do. The overall fall in lockup days was mainly due to an improvement in WIP days, whilst debtor days decreased only slightly. It is important that all team members, including partners, fee earners and finance staff, remember that working capital management does not end at the point of raising a bill. Promptly issuing a bill at the end of a matter is important, and sometimes the person best placed to chase up slow payers is the primary fee earner or partner, though this should not be at the expense of fee earning work.

The view from the finance team

We asked our participants for their views on the challenges facing them in their roles, both at an operational and personal level, and asked them to rank their top three challenges.

The challenges are broadly split into three categories: Financial compliance, cyber security and other day to day working issues.

Forthcoming challenges for finance staff

Cyber security and fraud protection

Despite the SRA Accounts Rules being on the minds of more finance professionals to some degree overall, it is the risks associated with cyber security and protecting the firms against financial fraud that is seen as the primary threat to the highest proportion of firms, with almost 30% of respondents citing this as their greatest challenge.

Even smaller law firms can hold large amounts of client money, and that is the obvious target for cyber criminals, but the threat to the firm office account should not be underestimated. Cyber security doesn’t just cover financial matters, as inappropriate access to sensitive or confidential data can cause irreversible reputational damage, as well as putting firms at threat of being held to ransom.

It is worth remembering that cyber security stretches further than deleting spam emails and not giving out financial information over the phone. There is plenty of guidance to help firms counter the risks, including guidance on the SRA’s website.

The clear message is that this isn’t a threat that is going to subside any time soon, and the need for simple, clearly enforced policies, as well as a robust and periodically reviewed training programme for new and long-term staff alike, is as important as ever.

Other challenges

Some of the other challenges noted by our respondents included:

• Getting to grips with ‘Making VAT Digital’;
• Legacy issues – such as dealing with residual balances and banking facilities – and the need to educate all staff, including fee earners, on the requirements;
• Threats from new entrants into the sector – especially some of the heavyweight consulting firms; and
• Dealing with partner successions and business expansions – at a practical and financial level.

Job satisfaction

We asked participants to give us an insight into the most important factors that they would consider when looking for a new job. Participants ranked their top three factors.

Important considerations when looking for a new job

The view from the partners

We asked our participants for their views on the challenges facing them in their position as partners and asked them to rank their top three challenges.

Forthcoming challenges for partners

Not only did the clear majority (84%) of partners cite the issue of retaining high quality staff as being one of their top three challenges, but the highest overall proportion (36%) noted it as being their primary concern.

Staff satisfaction and working practices

We asked respondents to tell us of any non-remuneration-based benefits or alternative working practices they offer to staff.

Non-remuneration benefits

Flexibility is the theme here. Working from home and flexible working hours were once seen as a temporary solution for staff under exceptional circumstances, but are steadily becoming an expectation. IT solutions that allow remote working are the norm and figure highly in many firms’ IT investment strategies. Of course, the need to manage the threats that this brings in relation to GDPR and cyber security is vital, but modern IT solutions should mitigate this risk.

Key performance indicators

We have also seen that monitoring key performance indicators (KPIs) and strategic planning are important to firms. We asked participants for their top three KPIs that they use (or plan to use) to monitor their achievement against targets.

Most important KPIs

If you would like to receive a copy of the full Saffery Champness ILFM survey of law firms, please contact Jamie Lane.