Creating a sustainable PI business model

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23 April 2015


By David Johnstone, managing director at Legal Futures Associate PI-Solutions

Johnstone: loss-leader strategy is highly questionable

Johnstone: loss-leader strategy is highly questionable

When faced with huge challenges, who survives? The firm that buries its head in the sand hoping for the storm to pass or the one that dares to face it head on in order to work out a clear strategy of what action to take?

Of course, they are rhetorical questions. We already know that those firms succeeding in this post-LAPSO world are those who’ve been proactive and/or inventive in dealing with change; those who’ve been able to see it as an opportunity as well as a challenge.

Over the last few years, those firms wishing to remain in claimant personal injury (PI), and carve out a sustainable business model, have adopted a number of different strategies to do so.

What is success?

At the end of the day, a successful business can be one that’s financially viable and delivers the desired lifestyle for the proprietor.

Simply by living within their means, a number of smaller firms are adjusting to life post-LASPO by consolidating their activities to one or two particular streams. By becoming lean in those areas, shedding resource in other areas and focusing on managing those who remain, profitability and cash flow is improved even though turnover may reduce.

Some have sold certain streams of work in order to focus on specific areas of claimant PI law and, at the same time, taken the opportunity for an HR restructure. In many instances, the decision to focus on a particular area has been driven by having a continuing ability to attract new work in that area. But whatever the case, going forward, they will apply just the right level of resource to the matter in order to ensure a high probability of being remunerated for the work performed.

Other firms have sold their work in progress (but retain new sources of work) and have used the capital to cover redundancies and restructuring departments to be fit-for-purpose in the new world.

The levels of remuneration available on pre 1 April 2013 work have, however, gone already and the inefficient practices that were sustainable are now where the opportunities lie for those firms that wish to continue in PI and were not already part of the small band of PI firms that were highly efficient pre-LASPO.

Firms remaining in the sector will have already identified efficiency improvements, but this must be a continually evolving process to keep the business as fit and lean as possible in order to weather further storms.

As we are still seeing cracks in many firms’ cash flow planning, resulting in insolvency at worst or if foresight exists, stepping back from claimant PI in good time, there will be benefits for those that remain, namely that the numbers seeking new work will fall and the remaining firms will see a reduction in the cost of acquisition per matter.

However, this may still be a long way off, as the number of firms still prepared to spend excessively on the acquisition of new work, to keep their machines primed, is surprising. Even with deep pockets, adopting a loss-leader strategy to retain the capability when the acquisition cost does fall is highly questionable when so many are fighting to be last man standing (or one of them).

Given the settlement profiles involved, the full impact of LASPO will take five years-plus to wash through, and funding a loss-leader strategy for prolonged periods will almost certainly end in disaster or huge levels of waste at best.

Those smaller firms that have battened down the hatches and developed niche areas of work that remain sustainable, may ultimately be the true victors of the change by being in an ideal position to take advantage of falling acquisition costs when they finally do come through, without the burden of significant losses and depletion of working capital.

Small can be beautiful

Successful small firms will match their larger counterparts in all aspects of business management and accurate and timely management information is key; whether it is achieved in-house or outsourced, management information allows principals to make decisions based on real-time information. By buying in such services, firms only have to fund what they actually need and do not have an expensive resource sitting about waiting for the next month end or performing tasks achievable with a lower skill set in the intervening period.

Another trait of successful claimant PI firms will be that they are conservative in their cash flow projections. Banks exposed to the sector are seeing more and more firms failing to meet the projected cash flows previously presented to them. This can be in part as a result of projections being prepared utilising previous experience and not fully factoring in the fact that the transition from pre to post LASPO has now started to bite, 24 months into the process

Unless this is done, it’s inevitable that the expectations created are not going to be met. By employing business analytics and getting this right, not only can small firms demonstrate to their bankers that they truly understand their business, but also that they can budget with confidence their own levels of drawings and what the business can genuinely afford to pay in terms of the human resource employed.

It can be difficult to cut one’s cloth accordingly, but those that do set themselves apart and are best positioned to enjoy the ongoing support of their bank.

The management information utilised by these successful firms goes way beyond core financial accounting and focuses as much, if not more, on operational efficiencies and risk management. Managing risk is possibly now the most critical differential between firms that will prosper and those that will struggle.

The days of being able to work on 10 matters, but only get remunerated on three and survive, are long gone for all and only the most specialised of firms should be working on matters where the prospects of success aren’t significantly better that 60%.

Any file opened and closed without generating revenue is a waste

Access to justice was never meant to produce an environment where claimant firms were obliged to work on matters they wouldn’t be remunerated for. It’s about giving the public access to your valued opinion and if your opinion is that the prospects of success are marginal, you should not feel obliged to apply further resource to the matter on a conditional fee basis.

Over the years it has never ceased to surprise me how many solicitors have no handle on how many cases fail to produce revenue. The mind-set is that a case is only lost if lost at trial, a very small number for most. The reality is that any file opened and closed without generating revenue is a waste of resource and a loss.

It’s about getting the balance right, not throwing good raw material away on day one but also investigating matters quickly and efficiently to assess the prospects of success and, if not excellent, getting the matter closed.

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