Law firms under lockdown: “A train that is running out of puff”

McCrum: Pipelines are beginning to run dry

Reduced billing by law firms in April was covered by a parallel fall in costs and arrival of government money, but the lack of new work is going to hurt them badly, according to new research.

It also questioned the viability of the large number of promotions that have been announced by firms in recent days.

Law firm consultant Simon McCrum has been conducting a weekly snap poll of firms to track how they are coping with the crisis, but delayed this one to cover the month-end. Twenty firms, from small to very large, took part. You can read our stories from the previous weeks here.

All the firms reported a reasonable month in terms of billings – even those that had seen them fall said it was not as bad as feared – while cash from furloughing and the government loan scheme, as well as deferring VAT payments, also helped.

Most firms expected May to be significantly worse than April and there was a consensus that if lockdown lasted into August and September, the outlook would be very difficult. Most acknowledged too that work would not return as quickly as it disappeared, whatever happened.

Mr McCrum said the findings showed “a train that is running out of puff”.

The solicitor explained: “Yes, firms are still living and fighting another day, and some have even increased profit as a result of working their old pipeline of cases and benefiting from having reduced salary costs and overheads.

“And billings on old cases and government cash has meant that few are yet seeing any cash crisis.

“But the pipelines are beginning to run dry. File-openings remain down. That can only mean one thing unless the position is reversed – particularly where firms are bringing forward billings and payments on account in many areas of law.”

Mr McCrum also questioned what would happen next year “when everything has to be repaid?”

The one-time managing partner noted how many promotions have been announced this month as the new financial year started at many firms. “Whilst usually a cause for great celebration, the inevitable increases in salary bills will have to be covered for these good times to keep rolling.

“Repeatedly, managing partners this month have said that they are not fooled by having done this well this far – they can see the writing on the wall and they fear the worst months are still to come.

“Things will be made worse if there is a removal of the furloughing money before the hoped-for pick-up in file-openings leads to cash generation – firms fear their hands may be forced.

“Firms and their teams have been hugely agile and have shown amazing adaptability at great speed – what happens next though is out of their hands.”

Law Society research published last week found that nearly three-quarters of small law firms believe they may have to close their doors in the next six months as result of the coronavirus crisis.

To help law firms understand the Covid-19 crisis and its impacts, and to help them to respond, Mr McCrum is posting regular briefings on his website, giving out relevant parts of his forthcoming book, The Perfect Legal Business. You can also watch insight from him on coping with the crisis on a Law Society video from last month.

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