Law firms “in denial” about their post-Covid finances

Murphy: Not clear why law firms are so confident

Law firms’ high level of confidence about the future – despite Covid-19 and Brexit – is at odds with a lax approach to finances and could indicate “an industry in denial”, new research has warned.

It also found that law firms could miss out on opportunities, with merger and acquisition activity likely to slow significantly in the coming year.

Some 80% of the 198 firms that responded to the annual survey by accountants Smith & Williamson felt either reasonably or very confident about the business outlook for their firm, compared with 58% in the wake of the 2008 financial crash.

Giles Murphy, its head of professional practices, said the source of this confidence was not clear, but it could stem “from the fact that many senior executives successfully navigated the 2008 crisis, and so feel better prepared”.

Mr Murphy said it could also come from the fact that 70% of the firms had used the furlough scheme.

The report described “an industry with its head in the sand” when it came to lock-up, which has not improved despite firms in previous surveys expressing confidence that it would.

“This improvement (if it ever happens) will come too late with many firms having to take out additional debt facilities, defer distributions and take advantage of government tax deferral arrangements as they did not have sufficient cash resources to survive the pandemic’s impact,” it said.

With two-thirds of respondents believing their biggest challenge over the next few years will be weathering the economic downturn – with 40% saying they used government support to ensure the survival of their firms – “the picture that emerges is not one of financial security”, Smith & Williamson said.

“Contrast this with the 80% of respondents who are reasonably or very confident about the business outlook for the upcoming year and it could be argued that this is an industry in denial.

“An alternative explanation is that the truly frightening predictions of the pandemic’s impact in March and April have not become reality – if law firms were worried about a complete disaster, but two months later the firm is still alive, that might feel like a success.”

The report cautioned that financial discipline was not widespread. “Even if firms recognise the value of having cash in the bank, it doesn’t mean they are particularly good at accumulating it. While most legal firms say cash receipts have held up well, will clients see legal invoice payment as a priority over the medium term?”

The proportion of law firms saying their firm was not looking at M&A or to recruit a new team over the next year almost doubled this year from 35% to 60%.

“The priority for many firms is instead managing as best they can with what they already have. Undoubtedly necessary, but is this too focused on the short-term, potentially missing out on longer-term strategies that could transform firms.”

The survey found that the most popular areas for investment over the next 12 months were around remote working, and all ranked higher than cybersecurity.

It said either law firms gave a low estimate in this area or it was “concerning”, because the shift to remote working could lead to an increase in cyber-attacks, as security became more difficult to enforce outside the traditional office environment.

While before the pandemic, over a fifth of legal professionals (21%) said they never worked from home, the proportion expecting to carry on like this post-pandemic shrunk to just 2%. Most (57%) expect to work from home one or two days a week in the future.

The accountants predicted that most law firms would adopt a “hybrid model”, with lawyers going into the office “perhaps three times a week” and working from home for the remainder.

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