With the Bank of England now forecasting lower growth and higher inflation for the UK economy, the threat of a double dip recession is a real (albeit far from certain) possibility. This is something law firm management can ill afford to ignore.
Growth and Law Firm Strategy
This will be the first in a series of posts addressing the various aspects of strategy that managing partners, senior partners and other law firm management staff should be considering in their strategy going forwards.
Planning Law Firm Growth
In the past law firms grew organically and, at times, almost without anyone noticing. Growth meant increased profits, which had to be a good thing. However, the past couple of years have transformed the industry landscape, and law firm managers need to very consciously consider whether or not growth is actually a goal that suits their business. Some firms may decide that they already have a sufficiently profitable and successful partnership, and that they do not want to grow.
For ambitious firms with healthy profits and strong balance sheets, growth is still a viable and, in many cases, desirable option. Indeed, growing at the expense of weaker rivals (whether through lateral hiring or acquisition) is one way for successful firms to cement their competitive advantage.
Funding Law Firm Growth
We have helped firms take advantage of market conditions to acquire rivals in the past year. In all cases, once growth has been decided upon as a strategy, the key issue to address is funding.
Any increase in the firm’s assets (mainly WIP and debtors) must be funded somehow. The three options are, effectively:
• Reduce lock-up
• Increase funding from the partners
• Increase borrowing
(For more detailed analysis please see our article Law Firm Strategy in an Uncertain Economy).
Realistically, a combination of the above will probably need to be employed. Partners should be aware that if they want to grow their business, they should be prepared to put up some capital of their own – firms looking to expand can no longer distribute all profits immediately to the partners.
Funding and Management Information
The most important factor in obtaining funding is to communicate effectively with your lender. The key to this is comprehensive, yet comprehensible, management information. This is an issue to which we will return (or please see our article, Banks, Law Firm Profitability and Management Information).
Whatever happens in the wider economy over the next couple of years, the situation in the legal market will continue to be tough. This spells both threat and opportunity for law firm management.