Limerick Solicitors Bar Association

Market Update

14th April 2011

David Rowe

Where are we?Our ‘average’ client – comparison with peak

• Profits reduced 25% to 50%

• Fee income down up to 50%

• Expenses reduced by 33%

• Headcount down 25%

• 1 10% pay cut down, another done or looming

• See getting a good salary as a result

• Debtors up significantly

• Balance sheet management now an issue

The Market – by practice area

• 5 main situations

• Commercial, Commercial Property, Banking etc down 70% to 90% off peak activity levels. Will recover, albeit at tighter rates. These areas are the differentiating factors, must keep investing in

• Litigation, Insolvency, Employment law up an average 20%, issue is to get paid

The Market – by practice area continued

• Private Client – Residential Conveyancing changed forever, fee rates after recovery will be irrevocably eroded below those which larger firms can service profitably

• Family Law and Probate – fees lower but still profitable in some circumstances

• State / tendered institutional work -20% / 25% reductions where tendered, lots of work will be retained – a big opportunity/threat

The Market – by practice area continued

• Where are the opportunities:– Commercial litigation

– Corporate restructuring

– Insolvency/Debt Collection

– Employment law

– Family law

– Crime

– Regulatory / professional indemnity

– Construction disputes

– Defence and plaintiff personal injury litigation

– Commercial deals (small transactions only)

– Estate planning / Wealth management / Probate

– Limited commercial and residential conveyancing – now leases

The Market – by practice area continued

• There is still work in the following areas but less of it:– Residential Conveyancing– Commercial Conveyancing– Company Commercial– Banking

The Market – Implications• Firms have changed radically over the past 3

years, those actively repositioning doing the best

• Repositioning/re-investing mean actively re-orientating the firm to the areas still active while keeping contacts where markets are quiet

The Market – by firm size

• Small firms – huge distress, main practice areas eroded (PI Litigation and Conveyancing) and Professional Indemnity Insurance uncertainties, many will fold their tents

• Mid-size – income back by 20% to 25% typically. Very quick to react on the cost base and not as economy dependent as large firms (good litigation, probate, crime and some institutional / State work). Some badly hit – developer / banking practices

The Market – by firm size cont.• Larger firms – huge challenge to reduce their cost

base and very economy dependent with fewer anti – cyclical areas than mid-sized firms but started from a position of high profits. Now picking up high end advisory work, NAMA work etc.

• Overall –serious challenges to survive, trend of work gravitating to larger firms

• Mid-sized space is best (with a strong litigation department)

• Significant oversupply of solicitors to work available – 5,000 to 7,500?

The Balance Sheet

• We now have firms struggling to stay afloat

• Not a time to owe and be owed a lot

• Banks tightening the criteria

• Many firms still overdrawing – negative capital accounts a no

• Getting paid demands a whole new set of disciplines and follow up internally

Keeping cash flowing

The new rules• Consider the credit risk before you take on the

work• Do not finance outlays (some exceptions)• Long term assets = long term finance• Have a structured credit control system, this

starts at accounts level• Know your breakeven and your profits per hour

figures

The Banks• See solicitors as a mixed bag

• Many firms or partners over borrowed

• Want the following as a norm:– Overdraft no more than 1 months fees

– Partners capital equal to or above lending facilities

– Capital items such as a goodwill payment, an office fit-out or a building purchase are outside these tests

• Changing the rules on set off

• Still regard well managed firms as premium business, the client account is a factor in this

What happens next?

• Currently work for 5,000 out of 7,500 solicitors in practice

• Litigation fees will come under pressure• Litigation, crime, probate and institutional work

will carry firms through• Slow recovery in the economy will lead to a

slow recovery in transactional work• Fees per hour will continue to fall

The Cost Base

• Other overheads will fall where reductions sought

• PI will remain high for 3-5 years

• Property costs will continue to fall

• Operating with good systems and appropriate cost base will become part of doing business

Structure of the Profession• The profitability between will run and poorly run

firms will widen, poorly run firms will be uncompetitive

• Amalgamations will happen from full mergers to overhead sharing convenience co-operatives

• New and dynamic full service partnerships will enter the market

• Many will leave the profession• More space for those who continue

Surviving

• Its survival time

• It is still about the fundamentals– Client service– Marketing – Good people– Effective management– Financial control

Client Service

• Going the extra mile for clients

• Same return of calls

• Prompt written response

• See client’s as the lifeblood of your business, not as a nuisance

• See transactions through the client’s eyes

Good People

• Recruit and retain the best

• Train and empower staff in a team environment

• Communications key, weekly or fortnightly meetings work

• Be hard on underperformers

Marketing

• It’s still out there, if harder to find

• Starts with service levels to existing clients

• About being visible and connected

• Look at mutual referral points

• Tenders are the order of the day– 250 Partner rate max

• Don’t take your eyes off client retention (more important than marketing)

Effective Management

• Now includes:– Finance– Human Resources– IT– Risk Management– Managing work flows

Financial Control

• Can we do the work and make a profit?

• How do we make sure we are paid?

• What is the correct cost of running my office?

• What do I need to bring in each month to earn a living?

• What does it cost me to do an hours work

• Can I buy my overheads better?

Conclusion

• The profession is undergoing radical change, size necessary to make a living is increasing

• Earning a good salary is now a result

• The demands and skill sets needed are higher in every sphere

• This phase will end, transactional work will pick up gradually

The Survival Guide• Recognise where we are – large fees not in the files anymore

• Look after clients with high service levels

• Bring your costs per hour down

• Get the cash in, up front where necessary. Do not fund outlays

• Consider a merger – will be right for some

• Run your firm on the basis current conditions will last 18 to 24 months

• Help available – Practice Advisory Service

For further information contact:

David Rowe

Managing Director

Outsource

Ph: 01 6788490

Email: dr@outsource-finance.com