Law Firm Resilience in a Crisis: Part One – Financial Resilience

Introduction to the “Law Firm Resilience in a Crisis” series

It hasn’t taken long for the statement that we live in unprecedented times to become a universal cliché – Covid-19 and the resulting financial crisis is impacting all businesses far and wide and it will certainly get worse before it gets better.

As consultants who work in the legal industry, located in multiple countries and continents and already building up a stock of real-life, often hands-on, experience of this uniquely challenging period, the Edge International team have an opportunity to observe, compare and consolidate what we see across the legal world.

Our “Law Firm Resilience in a Crisis” series of papers is the evolving output of that process. We have identified a number of topics that are at the top of the crisis agenda for legal leaders and will report on these, one-by-one, weekly from early April. We may well revisit some of the topics, as the crisis and recession develop and as we start to gauge the effect of different strategies. Part One focuses on Financial Resilience.

Edge International colleagues have also kicked-off a companion thread on “Remote Working” in the legal industry, and we will regularly cross-refer between these streams.

Financial Resilience

Financial Resilience in Context

Financial actions, even in the midst of such a fast-moving and impossible-to-predict crisis, should not be taken in isolation. There is a serious risk that apparently obvious corrective action on the financial dimension can have damaging consequences in other areas of the business, undermining confidence or the firm’s ability to compete or recover. Financial decisions need to be made more quickly than perhaps at any previous time in your firm’s history, but they need to be made in context and in line with a clear strategy and direction.

The need of the hour is strong and decisive leadership. Leaders need a “laser-like focus” on the direction they wish to set, and a clear strategy to navigate these troubled waters. The current situation is akin to being at war and leaders need to assemble a small group of experts that can provide strong direction and respond very rapidly to developing events and emerging information. In the current environment, the law firm cannot be run by consensus as it would in normal circumstances.

The key is not to panic, be resilient and rest assured in the knowledge that we can get through this. When we emerge from these troubled times the world will be different, generating new opportunities – many of which we cannot foresee at the moment. Whilst it may not seem to be the right time to be thinking about the future, the actions taken during this period will determine your future. So be Bold!

Business Continuity Planning

A word about business continuity planning. We will return to this topic in upcoming papers, but it has been a massive focus for many of you over recent weeks, and it would be wrong to dive into any discussion of resilience without addressing a few points on business continuity.

Many firms have probably thought about creating a business continuity plan (BCP), or reviewing and testing a dusty old BCP, in the recent past and have put it off in the “too difficult” box. Well, guess what? It’s here now and unfortunately many businesses are ill-prepared for the crisis we are enduring. If there is a lesson that can be learned from this unfortunate situation it is that a good, up-to-date BCP is like your most fundamental insurance policy and a must in all businesses.

Once the crisis is over, and before the next one emerges (and there will be a next one), we would urge you all to get the necessary expert advice and put in place a BCP suitable for your firm. As importantly, now is not the time to neatly pack away your BCP, thinking that it is only there for dealing with an immediate, very short-term and short-lived moment of crisis. A good BCP will help guide you through the next three to six months; your business continuity will be tested and could be permanently damaged as we move forward into the next stage of the crisis.

If there are three BCP learnings that we can take away from what we have seen already, we would highlight the following – each of which has a financial implication:

• All-round IT robustness, especially Internet connectivity, accessibility and bandwidth (in all your home and remote working locations and not just in your offices), is key to legal businesses in the 2020s.
• Laptops and remote working access on other devices for all staff is the new norm. The cost of this is far less than the cost of the disruption to your business. The best-managed firms had it in place already, the next best were able to roll it out quickly; but many others are still struggling to get the whole firm connected and working as well as they did in the office.
• The job now is to develop, enhance and fix the bugs in that hastily assembled remote connectivity; that will continue to exercise minds and stimulate innovative responses through April, May and into the summer. Without going crazy buying every remote working tool you ever heard of, this effort will rightly be a spending priority amidst a period of cost-cutting.

Financial Resilience Priorities

At this time, firms have to refocus their financial objectives and priorities. Resilience is the key. Pulling the firm through the immediate lock-down, economic crash and wildly fluctuating uncertainty is the first financial resilience goal. Reshaping the firm’s financials for the recession that has already begun is the second goal. Preparing the firm to recover as quickly as possible and thrive as conditions begin to improve is the third. These goals are achieved through:

• Protecting cashflows
• Managing costs
• Coordinating financial strategy with staff, clients and banks
• Building confidence and morale
• Looking for opportunity and embracing change; restructuring the business for the recovery, whenever it comes, and for the post-crisis future

We outline below some very basic steps in building financial resilience in these times.

Monitor Cashflow Daily

• “Cash is King” – This saying is true at all times, but especially in our current situation.
• Establish what your existing cash balances are.
• Create a detailed daily cash report to monitor the movements of cash in and out of your cheque and savings accounts. Don’t forget to include credit and debit cards.
• Add to the daily cash report all known inflows and outflows of cash on a weekly basis for the next four to eight weeks. Install a clearly communicated policy of ‘no surprises’ and insist that the central finance team is aware of all potential outgoings.
• This gives you a picture of your immediate cash needs for the very short-term future, particularly direct outlays (e.g., rent, partner draws, wages, supplies, etc.).
• All discretionary costs should be frozen until you can assess the situation and decide the costs are relevant to the current situation in your jurisdiction.
• The daily cash report does not need to be perfect, It is just a document to assist you in managing cash – with a wide-ranging diagnosis of the health of the cash in the business.

Bill, Accelerate Cash Collection and Accounts Receivable

• Professionals are generally reluctant to talk with their clients about fees, billing and collections. In times like these it is much more difficult.
• Now is not time to be shy. The survival and health of your business is based on the amount of cash you collect and the speed with which you collect it, so pick up the phone and ask for amounts due to you to be paid. A phone call is far more powerful than an email; it is “personal”, you can empathise with the client and strike a deal with them.
• Invoice for everything that you can bill for. Remember, your bills today are the source of cash flow in a few weeks’ time. If you don’t invoice, you cannot attempt to collect in a few weeks.
• You may consider doing deals in terms of discounts or instalment payments, or defer part of the outstanding fees; indeed, these steps may be essential to achieve any cash collection from some clients in financial difficulty. The key right now is to maximise your cash.
• On future deals, if you can get paid partially upfront you should consider this. When taking on new work, insist that already outstanding bills are paid before you begin work.

Manage your costs

• This may seem a very obvious statement, but costs should not be cut indiscriminately – there should be a strategy in place.
• Direct costs such as rent and staff costs cannot be cut easily, but there should be a strategy for this – perhaps a rental reduction agreed with, or deferment from, the landlord. Consider re-negotiating a new long-term lease with the landlord. Consider also cutting or deferring staff salaries and partner draws. This will focus the mind of partners that cash is vital and will put more urgency behind the cash collection effort.
• Freeze hiring. Use redeployment and share underutilized resources between teams and departments to address gaps.
• Consider the “Pyramid cut” if job cuts or furloughs are required. Look at your organisation structure as a pyramid, so when you shrink the organisation you cut a portion of each level equally; e.g., the business to shrink by 20% top to bottom. If the leverage in your pyramid is not competitive, consider adjusting it at this time. It is no use just cutting trainees and support staff as this will not be effective and the cost saved may not be significant enough. Remember that business will come back in time, and in the short term you will be scrapping for as big a share of a shrinking market as possible, so be strategic in what you cut by keeping an eye to the future.
• Now is the time to seriously consider addressing your non-performing businesses lines, lawyers, support staff and part-timers that do not add to the business in this crisis. Areas and roles that you were struggling to entirely justify pre-crisis cannot be ‘carried’ through this period without damaging your firm. This needs to be done strategically with an eye to what business may come back at the end of this critical period.
• It is important that the people that are retained are paid fairly as you need to maintain morale, especially when people are isolated and working remotely.
• Variable and discretionary costs should be assessed and anything which is not required (i.e. “nice to have”) should be frozen or cut. Identify your biggest suppliers and have a conversation with each one about reductions in service or cost or deferred payment terms.
• Close your premises if you are not using them, paying close attention to ensuring that running costs do not continue. If you have upcoming real estate lease breaks, this may be the time to decide to cut your square footage. Most law firms are already sitting on office space that is poorly utilized – especially those still working in cellular layout – and every prediction about the world post-2020 suggests there will be a dramatically reduced need for as much white-collar office space. Make your move now if you can.
• Do not cut your business development costs drastically; this is a mistake made by many organisations, as it’s an easy target. This category is distinct from general firm marketing and brand promotion, the “business as usual” activity which will not cut through in this climate. The investment in BD should be very focused and tailored on specific topics which are on top of clients’ minds currently, and on the practice areas where there is the best chance of winning new business and improving market share. Most importantly, all non-digital BD and marketing spend (e.g., events, face-to-face networking, travel) can, of course, be frozen in the short to medium term.

Build Your Cash Reserves & Credit Lines

• Building a cash reserve is now more important than ever. In an ideal situation you should have sufficient cash in the bank to survive four to six months based on your reduced cost structures.
• If you are entering this uniquely challenging period with low or no cash reserves, your focus should be on managing your finances to maintain your cash position, and not to allow bank debt to spiral. Your target is to avoid cumulative months of net negative cashflow, and plan to achieve net positive flows as fast as you can when there are signs of improvement. This may be the time to consider partner capital calls in order to address a structural imbalance between borrowing and equity.
• Remember that you may need to build redundancy costs into your estimations. In general, most significant cost reduction actions will have a lag time before cash outgoings reduce (examples are notice periods and dilapidations on real estate).
• Speak to your banks and get a credit line (revolving overdraft/credit facility); if you can, avoid term loans that you have to service every month, as this creates cashflow pressure.
• Many governments are providing support to businesses and employees, especially to SMEs; tap into these as much as you can, especially where employee-support packages allow you to furlough but retain staff on payroll and governments are supporting low-interest bank lending.
• Once you secure the credit line/government aid, use these as the principal sources of cash as the interest on this financing is cheap. Keep any actual cash reserves as intact as possible as your reserve fund for when you have no further credit sources to turn to.

Forecast & Budget

• Reassess your budget for the year by doing a rigorous profit and cash forecast. This should be reassessed monthly until the end of the year.
• Be clear with staff about 2020 financial year targets: in a period of extreme uncertainty and with gaps appearing in your fee-earning resources, now is not the time to be rigidly insisting that personal or team targets, set in a different world, are met. How do you re-set realistic, achievable objectives? Be seen to support the achievement of the best possible performance, not trying to drive it from ‘the top’.
• The budget for the following financial year should be prepared with an eye to recovery.
• Ensure managers and partners understand that all expenditure budgets are effectively ‘unbudgeted spend’ and require additional, just-in-time review and approval. Prioritize spending requests rigorously and request clear return on investment and payback period assessments. This is the time to put some extra priority on actions that will bring in work or improve cashflow in the short term.

Six Takeaways

• Don’t panic: You can get through this. The legal industry, and your firm, has faced major crises and recessionary periods before, and will again.
• React logically with a strategy. Do not “knee jerk” or “react emotionally”
• Lead from the front: Communicate, Communicate, Communicate
• Plan for the future. The way we do business currently will not be the way of the future. Invest in technology and ensure you build financial resilience in the business for the future. Rethink the shape and scale of each of your practice areas, sectors and geographical locations: the next few years will not look like the last few years.
• Invest in and have a robust IT infrastructure and BCP for future crises. The future of legal practice was already digital and that future is now here; eliminate paper, wet signatures and actions that rely solely on face-to-face interaction.
• Most importantly focus on how you can service your clients through this difficult time and how your actions help you to retain or gain a well-earned “seat at the table” as their trusted advisor.