UK: Focus: Winter 2013 - The Light Ahead

Last Updated: 16 December 2013
Article by Paul Wyse, Aine Reidy, Rachel Stone, Manus Quinn and Seán McNamara

EDITORIAL

By Paul Wyse

Home prices are starting to increase country-wide and Dublin is seeing double digit growth. The Central Bank forecast is for a continuation of the gradual recovery in the overall level of economic activity.

There has been a small recovery in consumer spending since Q1 and also in exports. GDP growth of circa 2% is forecast by the Central Bank for 2014. The recovery is gradually broadening. On the domestic side while prospects remain modest, employment continues to rise. While very significant action has been taken in recent years to lower the public sector costs and contain national debt, the levels of both in relative and absolute terms remains very high.

Ireland is at the point of exiting the EU/IMF programme but is doing so at a time when deficit and debt levels are high and there are risks to be managed in the future. The market will watch how Ireland performs outside the programme and whether the sustainability of the overall debt position is firmly secured. In the banking sector further progress is needed to address asset quality and profitability in order to put the system back on a sustained sound footing and make credit available to businesses on a more normalised basis.

Our recently completed second annual survey of the Irish law firms sector has predicted a positive outlook for 2014 and the highlights of this survey are set out in this newsletter. Aine Reidy helps us prepare for the New Year and gives some useful budgeting and forecasting tips. Rachel Stone sets out how to build partner performance models in professional practices to ensure partner business development activity is measured. Manus Quinn helps spot financial warning signs for professional practices. Seán McNamara reviews the first few months' activity under the new personal insolvency regime.

We wish all our clients, friends and professional contacts a very happy Christmas and look forward to a more prosperous New Year for all.

A NEW YEAR AHEAD - TIME FOR A NEW BUDGET AND FORECAST

By Aine Reidy

With a new year just around the corner it's time to turn our attention to budgets and forecasts for the year ahead. For many the focus in recent years has been on survival and cash flow continues to be a challenge. But, while times are still difficult there are signs of a sustainable recovery.

Accurate budgeting and forecasting can alert a business to opportunities arising in a changing environment, this in turn gives a business the chance to take advantage at the earliest possible opportunity and gain a competitive advantage.

Sales rise and fall, markets fluctuate. This constant change makes it difficult to cater for all potential eventualities. However, the need for flexibility does not excuse a lack of forward planning. Businesses should do all they can to plan for the ups and downs of the economic cycle, thus avoiding the pitfalls associated with fluctuations in trading and cash flow difficulties. The primary driver of such planning is the budgeting and forecasting process.

As well as being an essential part of the business and scenario planning process, budgets and forecasts are a key risk management tool in your business. Budgets are typically fixed in advance and remain static for the duration of a selected period. They provide management with the ability to identify how and, more importantly, why actual results differ from those that were originally expected. By referencing the actual results against the assumptions used in the budgeting process the reason for the divergence can be analysed. It may be that margins varied from those predicted at the outset of the period; perhaps an unwelcome bad debt arose; there may have been unexpected currency fluctuations; overheads may be out of line with predictions. A business must be alive to changes in the business environment and to the accuracy of management's own assumptions if it is to thrive and to grow its business.

It is a reality that budgets and forecasts have both an internal and an external audience. A business's bankers are likely to demand access to both. While there may be a temptation on the part of a business to tend towards the optimistic end of possible scenarios in the hope of impressing the bank, such an approach runs the risk of being counter-productive over time. Over-optimistic budgeting and forecasts militate against good business husbandry. Furthermore, the bankers will quickly lose confidence in a business that constantly fails to live up to its own forecasts.

While budgets normally remain fixed for the selected period, forecasts are updated as and when actual financial results become known. A forecast therefore acts as a rolling estimate for a given period, providing an informed view of expected outcomes based on current trading, as opposed to budgeted activity.

Many businesses prepare their monthly management accounts (an essential management tool) and compare these to both their budgets and their forecasts. Variations from forecast may indicate that market conditions are changing more rapidly than anticipated. Such variations against budget may indicate that original expectations are unrealistic and may lead management to consider longer-term changes that may be required in the business.

Tips on the budgeting process

  • Look at your track record of meeting budgets and consider whether your new projections are achievable. If past performance demonstrates evidence of poor or over enthusiastic assumptions, take note of these and make suitable adjustments.
  • Challenge your assumptions, or get someone else to do it for you. Talk to your management team and your external advisers – they will all have views and these can be used to clarify and tighten your expectations.
  • Make sure your profit and loss, balance sheet and cash flows are fully integrated and reconciled.
  • Think about sensitivity and prepare different versions of your budget based on different scenarios. Ultimately you will have to choose which final version you use, but it will be good to know that if your sales are 30% less than you anticipate, you will still have enough cash to survive.
  • Ensure that you regularly review your budgets and forecasts against your actual financial results. If variations arise, analyse these and understand the likely impact on your business. Take action early to counter any emerging threats.

A SUNNIER OUTLOOK - SURVEY OF IRISH LAW FIRMS 2013/14

By Paul Wyse

Our second law firm survey has just been completed. 101 law firms took part in the survey including 16 of the top 20 firms. This year has seen an improvement in outlook. Two in three firms surveyed expect improvement in the sector in 2014 as opposed to two in five last year. This is particularly so for the largest firms where 88% expect an improvement in 2014. The areas of business where most improvement is anticipated are in property/conveyancing and in litigation services.

The key issues facing the sector continue to be as follows.

The key actions taken by legal firms in the previous 12 months to improve performance are as follows.

Revenues and profitability

Revenues have increased in 81% of the larger firms surveyed and in 45% of the mid-tier and smaller firms surveyed in the sector. Revenues have decreased in 26% of the firms surveyed. Profits have increased in 68% of the larger firms and in 40% of the remainder of the sector.

However fee pressures continue in the sector as almost one in three firms surveyed have seen:

  • profits decrease (30% of firms surveyed)
  • bad debts/bad debt provisions increase over last year (34% of the firms surveyed)
  • billing rates decrease (36% of firms surveyed).

Employment in the sector

The good news for students interested in a career in law is that one in three of the firms surveyed predicts an increase in the number of trainee solicitors to be taken on by their firm over the next 12 months and that the level of qualifying solicitors being retained post qualification will increase particularly in the larger firms. At an operating level most firms have either continued to employ the same or increased numbers of full time solicitors. 81% of the top 20 firms have increased their numbers of full time solicitors. This is significantly lower in the rest of firms as only 22% have increased their full time solicitor numbers over prior year levels.

International business

The UK continues to be the most significant source of international business for the legal sector in Ireland. Almost half of all international work carried out by the firms surveyed comes from the UK. It therefore continues to be key for firms to have established relationships with UK law firms and lawyers. Europe accounts for 29% of international business and the USA accounts for 17% of international business of those surveyed. The US business is significantly higher for the larger legal firms and represents 36% of their international business. Most (75%) of the top 20 firms surveyed are increasing their efforts to attract international business.

The new personal insolvency legislation

There is significant concern in the legal sector as to whether the new personal insolvency legislation will address the debt issues of people in difficulty. 89% of the partners surveyed are either unsure or perceive that the legislation inadequately addresses the issues. The areas identified for improvement are the bank veto, the realism attached to debt forgiveness and the complexity of the legislation.

Most of the partners surveyed (61%) were of the opinion that the UK bankruptcy regime is preferable for individuals as it is quicker and more efficient. It is also fair to state that it has well defined and established procedures and operating processes with lots of case precedent and learning experience as it has been enacted for some time.

Conclusion

The legal sector appears more positive about the outlook for the sector in the next 12 months. The larger top 20 firms are more optimistic but there is a strong sense of positivity in the results of the survey across the sector. Our economy continues on the road to recovery in small steps. There has been a noticeable increase in activity in recent months which will hopefully continue. It appears that the legal sector can look forward to growth opportunities in the domestic and international markets albeit that fee pressures continue to be a feature of life in the sector for the foreseeable future.

We wish to thank most sincerely those who participated in our survey. The survey is available at: www.smith.williamson.ie/publications

BUILDING A PARTNER PERFORMANCE MODEL

By Rachel Stone

As part of our series on a balanced approach to measuring partner performance, Rachel Stone moves on to business development and measuring partner activity.

It would seem logical that all partners have business development responsibilities for their team and firm. So we look here at some of the measures you might use as part of your balanced scorecard to assess how partners find and win new clients.

Building a pipeline

Each partner is different in their approach to the business development process. Some are veterans of the cocktail party and networking event, picking up business cards and new connections smoothly as they work the room. Others do far better in one-to-one situations where they can get under the skin of a prospect's business and quickly demonstrate their ability to add value. It's important that each partner knows their own business development strengths and builds these into a strategy for finding and winning new work. Helping partners to focus on their individual business plan and target list can add real value to this. It can give individual partners and departmental partner teams clear direction and momentum, even in difficult economic times. A business development planning tool can also help newer partners build an early prospect pipeline.

Effective measurement of business development activity and outcomes

When it comes to measuring business development activity and outcomes (and it's very rare to see great outcomes without high activity levels), you may wish to consider some of the following questions.

  • How active is this partner in promoting the firm to our business community?
  • How successful is this partner's involvement in marketing activity for their team and for the firm as a whole?
  • How much networking activity does this partner carry out and what comes of it?
  • Does this partner have a robust process for generating new leads, following up on contacts and managing the conversion of prospects to clients?
  • What success does this partner have with formal tender situations?
  • What success does this partner have in informal business development situations where a proposal will suffice?
  • What new work has this partner won for their team and others in the firm?

Recognising individual styles

In terms of business development, one size rarely fits all and helping partners to identify and maximise the impact of their own style can pay dividends for the individual and the firm. Do not forget that confidence is crucial to the success of most business development activities, so investing in partner support and training is usually a wise move.

At Smith & Williamson, we have assisted a number of professional firms to introduce and enhance their existing partner performance model.

PROBLEM? WHAT PROBLEM? SPOTTING FINANCIAL WARNING SIGNS EARLY IS ESSENTIAL FOR SURVIVAL

By Manus Quinn

Manus Quinn examines the warning signs that, if identified early, can greatly improve the recovery prospects of firms in financial difficulty.

An inevitable consequence of the recent economic turmoil is that some professional practices, large and small, are suffering from falling profits and liquidity issues. In extreme cases, this has led to the failure of some firms. For every high-profile failure, such as the administration of Cobbetts LLP earlier this year, there are numerous, less well-reported failures of smaller firms. There has also been a marked increase in professional practices and their lenders seeking restructuring and insolvency advice – a trend that is unlikely to reverse in the near future.

As a further indication of this problem, in our latest annual survey of the legal sector, the greatest concerns to firms were the fragility of the UK economy, pressure on fees and maintaining profitability. Cuts in legal aid, the Jackson reforms and increased competition from 'Tesco law' are also unwelcome contributory factors to a general lack of confidence within the sector.

Common warning signs

The first step to stability and recovery is to identify (and accept) there is a problem. Below are some of the more common warning signs that a firm may be heading for trouble.

  • Lack of clarity and agreement on the firm's strategic direction – The goals of senior/equity partners are often at odds with those of junior/salaried partners, leading to incongruent behaviour.
  • Higher than expected rates of voluntary departure of partners and other key fee-earners – Dissatisfaction with the direction of the practice or perceived unfairness in the reward structure may well lead to the exit of better performing fee earners. Together with a failure to deal with weaker performing staff, this can result in dissatisfied clients and subsequently falling profits and lower billing recovery rates.
  • Inadequate management information systems – Firms should prepare management accounts to assess their trading performance and current financial position (especially lock-up). They should produce an annual budget, apply key performance indicators (financial and non-financial) and short-term cash flow forecasts. These tools are essential when it comes to making the appropriate decisions to maximise profits and control cash.
  • Level of drawings not realigned with lower profits – When profits start falling firms often fail to realign their outgoings, resulting in a depletion of cash reserves or increased reliance on overdraft facilities. A further consequence of this is an imbalance in levels of bank debt compared to partners' capital.
  • One or more new initiatives requiring capital investment – This can include expansion into new territories or service lines – usually slow burners in terms of revenue and profit generation, while being a significant cash drain in the early stages.
  • Passive billing and collection procedures – While lock-up is a contributory factor in many cash- stricken firms, accelerated billing and collection processes can have a dramatically beneficial effect on liquidity in a relatively short period of time, reducing the level of funding required from other sources (especially the bank and the partners themselves).
  • Lack of professional advice and support – Denial and/ or unwillingness to seek professional advice is common among professional practices. While a natural reaction may be to try to resolve issues within the sanctum of the firm, the implications of wrongful trading, particularly when coupled with unlimited liability (if a general partnership), should be a sufficient wake-up call to being more proactive in getting external professional advice.

Identifying and dealing with issues quickly and conveying the subsequent strategy (and progress towards delivering it) to key stakeholders, including the bank and your own staff, will greatly improve the chances of recovery and survival.

BANKRUPTCY IN THE UK - STILL BETTER? THE PERSONAL INSOLVENCY REGIME SO FAR

By Seán McNamara

The new personal insolvency regime went live on 9 September 2013, and put into action some important and long overdue changes to our bankruptcy laws. After its first two months in operation, is it a success?

While the introduction of these schemes has set a useful benchmark for many clients when they engage in consensual negotiations with their banks, it is still early days and the simple answer is 'not yet'.

Recent press coverage and the comment from insolvency professionals indicate that the new regime has not opened a floodgate of applications for debt write-downs. Prior to its introduction, some commentators anticipated that in the first 12 months up to 15,000 individuals would apply for the non-judicial processes (Debt Relief Notice (DRN), Debt Settlement Arrangement (DSA) and Personal Insolvency Arrangement (PIA)) and that there would be over 5,000 bankruptcy applications. At Smith & Williamson we felt that these numbers were not realistic and we are not surprised by the relatively slow take-up.

Exact information is not available from the Insolvency Service of Ireland (ISI), although its website states that it "...fully intends to provide quarterly statistics once a statistically meaningful number of applications have been processed". We understand from press comment that to date only three protective certificates have been issued for a PIA and no information is available on the number of cases being processed by the ISI.

Why has the public reaction to the new legislation been so muted? Is the legislation as currently drafted fit for purpose? We have a number of observations.

  1. Bank veto. For debts over €20,000, a proposal requires 65% creditor approval. In effect, the banks control the process and the public believe that in many cases the new legislation is not workable. For example, if a debtor has been unsuccessful in reaching a compromise with their bank, why would they feel that by entering into a PIA it would yield a different result?
  2. Personal Insolvency Practitioners (PIPs). There are 82 authorised PIPs in Ireland, however many of the recognised
  3. insolvency practices are not represented. Many firms are not entering this area because of a mismatch between what they perceive to be the onerous responsibilities attaching to a PIP versus the level of fees available.
  4. Fees. Initial information indicates that the vast majority of applicants have insufficient funds to pay either a PIP or the fees charged by the Insolvency Service.
  5. Minimum criteria. Many people seeking to enter an arrangement are not earning enough money to qualify. One practitioner recently commented that of over 1,000 cases on their books, almost half fail to meet the minimum criteria required to fund a PIA or DSA. For these individuals, bankruptcy remains the only option.
  6. Cautious approach. The introduction of personal insolvency legislation was always going to be a slow burner as people are understandably cautious. It will more than likely be well into 2014 before we any real level of cases coming through.

Where to now? For many, the UK bankruptcy route remains the best option. Where debtors comply with the process, they should expect to be discharged within 12 months.

Where debtors have been unsuccessful in reaching a consensual approach with their banks, bankruptcy in Ireland is now a realistic alternative. The minimum period has been reduced from 12 years to 3 years, and it is no longer a 'life sentence'.

With the possible exception of Debt Relief Notices (for debts less than €20,000), the non-judicial options do not appear workable in their present format. We believe that some tweaking of the legislation is required to address the imbalance, where the banks hold too much influence in the process.

We have taken great care to ensure the accuracy of this newsletter. However, the newsletter is written in general terms and you are strongly recommended to seek specific advice before taking any action based on the information it contains. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. © Smith & Williamson Holdings Limited 2013. code 13/1077 exp: 31/03/2014

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