Category: Recovery

Professional Indemnity Renewal

Every year a majority of solicitors firms renew their Professional Indemnity Insurance on October 1. Despite regular exhortations from the market many firms leave it late but brokers still manage to come up with cover at the last minute.

Even at the best of times the PII renewal can be a time-consuming process, and it is often overlooked that there are two sets of underwriters involved-both an insurance underwriter and a credit underwriter providing the funding in advance for the annual premium.

This is not usually a problem as the specialist brokers have links to specialist lenders and both are set up to handle it smoothly.

This year looks different. Both markets for insurance and for money have hardened.

Several articles in the press recently have explained the background to the professional indemnity insurance market. Historic losses, the additional risks of remote working and concerns about financial stability following lockdown have served to reduce the overall capacity in the market and made underwriters more selective and expensive. A recent Law Society Gazette article suggested increases in the order of 30% could be widespread

The insurance underwriters are looking for substantial firms which meet the following

good risk management and systems,
a good claims record,
strong finances and
an immaculate presentation of the proposal documents.

Providing these conditions are all met cover should be available even if at a higher price than last year.

If the above conditions are not met things could get trickier. We have already seen examples of eye watering premium increases and punitive conditions attached. Underwriters are asking far more questions, so unless the proposal presentation is immaculate there can be several iterations before cover is offered which not only takes up valuable underwriter time and capacity but delays the process overall.

So what happens if not all the parameters are met? Cover may not be available but more likely Cover may be available, at a price, leaving only the finance to be arranged

But here’s the rub

Credit underwriters are also being more selective, asking far more questions, and taking much longer to reach an answer if they are even in the market at all (many aren’t). By an unfortunate coincidence the Coronavirus Business Interruptions Loan Scheme (CBILS) closes on September 30, so credit underwriters will be busy processing the last-minute applications under that scheme.

An influx of solicitors professional indemnity insurance applications could leave them overloaded-and take the turnaround time past October 1, even if successful. We’ve already seen credit applications which would normally take 48 hours to turn round take almost 2 weeks. And even then not all have been successful.

It is now early September, so there is less than a month to renewal. If you meet all of the conditions described above you should progress through the green channel and should still have time.

But simple arithmetic says that you need to be getting both your cover and funding agreed in parallel or you could already be too late.

Steps in Sync

The current crisis is having a very different effect across the sector.

But so far many of the firms that I speak to are having far less of a problem than they had expected only a few weeks ago. Most firms are telling me that that their billing is holding up reasonably well. Since the lockdown started in late March the cash flow has been reasonably strong and has been helped by the CJRS Furlough refunds.

But when I’ve probed into the data about new work and about value creation the picture is far more mixed and generally less optimistic.

It has long been the case that law firm’s primary short-term measurement is their billing level. Unfortunately, excessive focus on this obscures some underlying issues

Firms need to hit their billing targets, and even more importantly collect in the relevant cash!

But it is just as important that they open at least as much value of files as they bill in any given month. Of course, many firms don’t bother to identify the value of the files that they open in any given month, so we have to use the numbers of files opened as a proxy. But it remains the case that unless you open at least the same value of work as you complete, your business will decline. In effect you will be selling the family silver-or as we prefer to describe it you will be draining the tank.

A third thing that we have to do in order to ensure our business is in sync is to understand and measure the amount of value that we are creating in each month. It still surprises me after many years just how few firms carefully monitor work in progress creation and movement.

Unless you open matters on which to do the work, and then create value by doing the work, you have nothing to sell, and therefore the billing will not follow.

We know that many fee earners much prefer doing the work (chargeable time) to going out and winning it-we also know that What Gets Managed Gets Better. So, for many firms it is relatively easy to monitor the amount of chargeable hours that their fee earners are doing even when working from home- it is much harder to assess the business development work that they’re doing. Therefore, any fee earner who wants to look good can keep their billing levels high by keeping their Chargeable Hours high and Neglecting to bring in tomorrow’s work.

By not keeping matters opened, value creation and billing in sync our fee earners may just be sowing the seeds of future decline.

It’s much harder to fill the tank up again than it is to drain it

The Misery Index

When the COVID 19 Crisis struck the Chancellor acted very quickly to help affected businesses and employees with the CJRS Furlough and a range of Government backed loans.

But most of the measures have done little to mitigate the impact on Law Firm Owners, who will still be hit hard.

The Furlough scheme is a real help and has prevented (or at least deferred) many redundancies, in the hope that the recession, whilst deep, may only be short lived. But the loans only spread the impact – they do not reduce it. They turn a major hit into a series of smaller ones over (up to 6 years), and they make the cash flow consequences survivable for most – But the total damage is still there.

So far as I can see for most well-run firms with a typical mix of Residential Property, Private Client and Owner Managed Business clients the likely hit will be in 6 Figures.

How do I arrive at that?

I start with the position of the firm Pre-COVID – actual or budget, as the benchmark, (many firms have March or April year–ends, which coincide with the start of COVID)

I then look at the likely reductions in Fee Income. Of course, this varies by Department/work type, but for most mixed/high street practices this is unlikely to be less than 20% in this financial year – for many it is more.

There are some cost savings to be made – including the impact of the Furlough grant. In most cases these staff cost savings are less than half of the lost income – often closer to one third, but this depends on a range of factors specific to each firm. And then, there are some savings to be made in other overheads, but many of these, such as Rent, PI Insurance, IT are fixed – so the savings are likely to be modest.

This scenario assumes that the economy recovers fully by mid-2021 and that there is no second spike.

So how can we evaluate the impact on partners let us take a simple example of a £5m turnover firm which loses 20% of its revenue (£1m) and saves £350k in staff costs and £50K in other overheads. This firm would suffer a profit reduction of £600K – so simply divide by the number of equity partners to arrive at the impact per PEP. Suppose there are 8 Partners, this would produce a hit per partner of £75K.

If the fee income fell by 30%, and the other ratios followed, the hit per partner would be over £100k. There would be less tax to pay, but that is scant consolation.

It is important to understand that this damage is being done here and now and there is little that can be done to avoid it hitting the profit and loss account, and thence Partner capital. Borrowing money merely spreads the cashflow impact.

For some Partners, the COVID damage may wipe out their Capital/Current accounts. For other looking to retire, this may affect their life plans. There has been plenty of publicity about the impact on other industries such as hospitality. The impact on Law Firm Partners seems to have gone below the radar.

Sanity, Vanity, Reality

Whenever I start a finance workshop with Partners, especially Managing Partners I ask the delegates what their most pressing issues are.

Invariably the most common concern is cash flow. Thriving growing firms can find it difficult to fund their growth whilst the less successful find it hard to cover their costs.

Why is this always so pressing?

At its simplest law firms focus on a single measure -profitability. All the public comparisons and most internal documents focus on profitability. Reliance on a single metric is like a one-legged stool. However large and strong, it is liable to fall over!

Accountants use three measures to monitor business health – Profit, Balance sheet and Cash flow.

As the American writer Ed Reeser said a few years ago “Every major American law firm which has gone under in recent years had plenty of profit until the day it died – it is a lack of cash which kills law firms – not lack of profit “.

And yet, few law firms give any prominence in their management information to cash flow analysis, and the forward-looking cash projections. Too much attention is focused on profit not enough on cash flow.

After all there is much truth in the old saying “Turnover is vanity, Profit is Sanity, Cash is Reality “.

Becoming a Recognised Rainmaker

‘It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so’.

The Oscar-winning 2015 film “The Big Short”

In this is article Bob Spence and Barry Wilkinson will focus you on using your existing people skills to become one of your sectors recognised Rainmakers.

https://www.dictionary.com/browse/rainmaker

Our opening statement was attributed to Mark Twain who was clearly ahead of his time as many of his quotes are relevant to Rainmaking. According to our data-to-results experiences, covering the last 27 years, there are recognisable trends that are strategic errors in business development.

All you need in this life is ignorance and confidence and then success is sure

Mark Twain

The first one error is this. It is vital to be able to identify and describe with immense clarity the people that should form part of your Rainmaking network. Very few people can do this.

So, our first key question is what type of network should you be building?

Can you answer that question accurately?

It is worth a reflection, so be honest with yourself.

Can you describe your ideal network of connections in detail? Can you explain to your peers and colleagues why you would need this type of network to succeed as a Rainmaker?

Due to the urgency and pressures that Rainmakers are facing our network algorithm research looked at the popular myths and misconceptions that all lawyers are surrounded with. Many of these myths are constantly being reinforced. Our findings explored why we should question them.

Aleksandra Gora, CEO of Rainmaker PRO software with Professor T. Turowski

Think of the amount of time that is spent on crafting the professional ritual that is the ‘business-card-exchange’. Whether you refer to it as the ‘elevator-pitch’ or ’60-second-introduction’ or whether you deliver this business-card-exchange informally within mixer events or formally within the context of a ‘speed-event’ you are essentially an ‘aspirin looking for a headache’?

It is better to keep your mouth closed and let people think you are a fool than to open it and remove all doubt

Mark Twain

Why is this process given so much credibility? There are best-selling books, well known speakers, training programmes delivered at a high premium and webinars that embed this process as a ‘must-have-skill’ into the successful Rainmaker.

Why would this process have the ability to create the right Rainmaking connections?

It is actually very difficult to apply science to your network of Rainmaking connections.

This would be to provide an accurate understanding of how you are hitting your revenue figures. Is it because of your network or in spite your network?

Get your facts first and then you can distort them as you please

Mark Twain

However, this need not be so. All of us working at developing our practice on a day to day basis wrestle with two conflicting trains of thought.

The first is that it makes sense that generating outstanding commercial results as a lawyer requires a lean, well-managed, well thought-out, strategic networking plan. You have only so many hours in the day, and there is no time to waste effort networking and deliver your Rainmaking in the wrong areas.

This train of thought competes with the second which is that that this activity is essentially a “numbers game.” If you want to win the lottery, you have to buy a ticket.

The second thought generally overrides the first. There is so much more positive noise around this argument. Many lawyers adopt a set of actions enabling them to create minimal professional connectivity to the largest number of people possible. This second approach is reinforced continually by measuring the activity around investing time into developing new relationships. This can be on-line and off-line.

Let us make a special effort to stop communicating with each other so that we can have some conversation.

Mark Twain

This is the ongoing consideration of quantity versus quality in an approach to hitting our client acquisition targets. You have to make strategic decisions in terms of what works for you in the context of your time and what you offer professionally. These articles in 2020 will help you make those choices.

Keep in mind that a maximum of 3°of separation is the introduction threshold to improving your network development. Our extensive use of algorithms showed these powerful results:

Someone who knows you well and is able to introduce you to someone that they know well is communicating your value within 1° of separation. The likelihood that an introduction could happen through a well-positioned request is a maximum of 82%.

Someone who knows you well and knows another party really well being able to influence that second party to introduce you to another party is communicating your value within 2° of separation. The likelihood that an introduction could happen through a well-positioned request is a maximum of 17%.

If we push this formula to add another chain to it which means communicating your value within 3° of separation through a well-positioned request has a maximum likelihood of 0.8%.

As your time is money these are actually financial odds so why would you even consider anything beyond 1° of separation? (A random business-card-exchange is not even in this measurement system).

You are in a casino and investing time. What odds would you play to?

I doubt if many of us would bet against James Bond but in reality, you are if you ignore the 3° of separation thinking. Our extensive use of algorithms asks:

Does this new connection have the likelihood to be an improvement on who you already know, and are they within 3°or less of a meaningful introduction?

Is this new person already within a chain of three introductions to you? Is there someone in the room that can vouch that you are a person worth knowing? (That is 1°of separation). Is that person able to follow through for you? If not, then apart from professional courtesy requirements, will they really form part of your strategic network on the basis of your ‘business-card-exchange’.

This approach may be at odds that only the fees earned should be measured. This is a view that Rainmaking effort on a week to week basis is irrelevant unless it scores generates fees/wins clients. Networking management is also Rainmaking effort and is the key to ensuring that you are continually 1°of separation from a fee earning introduction.

There are lies, damned lies and statistics.

Mark Twain

Our thinking based on analysing networking results thoroughly is that you must manage your connections ruthlessly and to the highest standard possible to differentiate yourselves from the competition in terms of networking behaviour. Every new connection has to survive the 3° of separation benchmark. If it does so, when you need to manage only the connections that fit within this framework.

We still, of course, have the same number of client hours per week to work with as we did twenty-five years ago; at the same time, the client can access our online presence 24/7.

Finally, as business development professionals we are constantly being challenged with the concept of “return on engagement” against the Rainmaking actions we take. So how do we measure this consistently apart from immediate revenue returns?

As an overview, here are some of the vital questions we will help you understand in our 2020 articles:

1) Why can the returns on business development networking deteriorate?

2) What are the major networking pitfalls we must avoid?

3) What are the skills we need to avoid the reduction of return of effort?

4) How do we pick out the most appropriate people to connect and network with?

5) What information do we need to build our network?

6) What are the current best practices in business development behaviour?

7) What are the best methods of implementing a networking plan?

8) Why is 3°of separation of separation the only benchmark in a strong strategy?