A Menzies icon of a handshakeSince the summer of 2013, we have seen the administration of Harris Cartier, Manches and Davenport Lyons. Why has summer 2014 been so quiet so far?

Have firms suddenly become more organised with their PI renewals? Perhaps SRA interventions are now progressing smoothly, or the LAA has started agreeing sensible payment terms on outstanding legal aid debt. Or maybe, with an election around the corner, HMRC has been told to go easy.

A more plausible answer is that firms have enjoyed a capital injection from fixed share partners, as “required” by the disguised remuneration legislation that came into force earlier in the year. At 25% of profit share, it would easily plug a hole in most firms’ working capital.

So much so that even some non-LLP firms have adopted the 25% benchmark.
My blog article on 9 January suggesting that the new tax changes for law firms could be beneficial urged law firms to focus on the positive side effects of the new regulations and use the capital injection to invest in the firm’s future. So has this come to pass?

In some respects, I think not. The legal services sector has a dismal record for retaining capital and matching it to long term projects. So could firms have suddenly seen sense and adopted prudent management practices? My fear is that they have seen little more than an opportunity for short-term gain.

If that is the case, I am not sure the fixed-share partners will be particularly enamoured to know that their funds have simply plugged gaps in working capital. Gaps that resulted from a poorly run full-equity team. They would be even less enamoured if it was used to fund current account payouts to that same equity team?

I sincerely hope there is another explanation, as surely the influx of funds into cash flow presents a rare opportunity. Well-funded firms, able to invest in IT and the efficiencies it brings, would be in a great position to grow. They could attract higher quality staff and enable fee earners and partners to drive the business forward.

Over the past 18 months our legal and business turnaround teams have been instructed to help on many aspects of a law firm’s business equation.

Whether it be setting production targets, introducing billing regimes or debt collection disciplines, our involvement is based on helping internal management to achieve a better-run practice.

As well as understanding the entirety of the business operation, our priority is to remove as much risk from the business as possible. Removing risk drives up capital value. I can only hope that law firms are also trying to drive risk out of their business, and that is why there has been so little bad news this summer.

The alternative is that historical working practices have continued, with poor lock-up and working capital management being masked by a temporary influx of capital funds. If that is the case, the 2014 summer of discontent has simply been put off for twelve months.

Comments written by Peter Noyce – Partner.

For more information about Menzies LLP or to talk to us about this blog piece in more depth, contact your Menzies Relationship Partner or contact Menzies directly.

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