Description
Strategies For Survival, Strategies For Growth
Law frm fnances have been making headlines for the wrong reasons.
A further crunch point came in November 2013 when a worryingly
high number of frms across England and Wales were unable to secure
professional indemnity insurance and face potential action from the SRA.
This latest in a run of bad fnancial news for many frms confrms that a
tipping point is being reached across the legal industry. The impact of
changes in legislation, restricting referrals, changing fee structures and
the calculations of costs, are now also coming through the business cycle
to hit fees and proftability. For many frms the combined impact of these
developments is creating a well-founded sense of urgency.
Whilst the challenging economic climate has hit many frms hard, there are now these other factors
coming together to place additional strain on law frms’ traditional operational, fnancial and business
models. Regulatory developments including the Jackson Review of Civil Litigation and the Legal
Services Act are reshaping the commercial legal sector. A combination of technological developments
and outsourced business models are enabling some routine high-volume, low margin work to be
carried out in low-cost offshore jurisdictions by new types of legal service provider. Overall, the legal
sector looks to be undergoing a transformation that is structural rather than simply cyclical.
In this frst paper we consider some of the very timely and pressing business, operational and
fnancial challenges, as well as the opportunities, that EY’s extensive experience in the legal market
highlights as the most urgent that frms, and their stakeholders such as funders and regulators, will
need to address as they move forward in a fast-changing market.
Look out for our next legal sector insight papers in the coming months, which will consider how to
best manage the conficting interests of key stakeholders, how legal practices can evolve to ensure
they remain ft for business and what opportunities exist for those practices with funds available
for investment.
Strategies for survival, strategies
for growth
January 2014
Legal sector insight
Issue 1.0
2 | Legal sector insight January 2014
A market in transition
The Solicitors Regulation Authority (SRA) recently reported
1
that a high proportion of frms it surveyed were facing signifcant
fnancial stress, with more than 30 of the largest 200 frms in the
UK in fnancial diffculty. In its report the SRA pointed to a number
of practices associated with frms facing fnancial diffculty.
These include: an inability to measure or control fnancial
performance, excessive use of borrowing, weak processes for
collecting on bills and inadequate planning and due diligence for
acquisitions of other frms.
Those challenges accord with EY’s experience of working with
clients across the legal sector. Where we have been helping
frms in turnaround, for example, we are often seeing problems
that have arisen from high fxed costs as a result of expansion
strategies that made sense in the boom years. These are
accompanied by declining revenues as a consequence of both
general economic conditions and over capacity in the market.
On the other hand, we have worked with many frms that have
weathered the storm and are now exploring the opportunities to
grow and capitalise on market conditions.
Our work in the sector highlights that all key stakeholders,
i.e., law frms, lenders and regulators, need to ask some vital
questions about the approaches that will secure the best
outcomes for all parties.
? Lenders may need to review in detail their overall
understanding of their clients’ activities and funding in order to
achieve clarity on risks and the information needed to robustly
review current and future funding arrangements for the
longer term.
? The Regulator is currently very active owing to widespread
market stress and change and may need to ensure that it can
access the right advice to achieve solutions that will balance
the interests of frms and their lenders whilst protecting the
clients of frms.
? Partners should be seeking to review and plan suffciently in
advance of any potential problems in order to maximise the
fexibility and agility with which they are able to manage their
businesses through potentially tough times.
1 Navigating stormy seas: fnancial diffculty in law frms SRA, November 2013
3 Legal sector insight January 2014 |
Some key issues to consider
EY has worked with a number of frms to help them reorganise
and address stressed fnancial and business situations. None
has become insolvent or resulted in regulator intervention. Our
success in working with those frms has highlighted that any law
frm in turnaround will have to address multiple issues, including
organisational change, cash management, debt restructuring,
strategies to retain key personnel, negotiations with funders and
so on. Below we highlight some of the key issues we commonly
encounter and their implications.
Regulatory change arising from the Jackson Review and the Legal
Services Act:
? End of referral fees, pressure on revenues
? Changing costs regime
? New competition in the market for low-margin, high
volume work
? New corporate structures with non-lawyer owners/investors
create the potential for new corporate forms but raise
cultural challenges
Funders’ shrinking appetite and withdrawal from the market at
a senior, clearing bank level and also by secondary and tertiary
providers of fnance. Key consequences include:
? Partner time diverted to focus on managing funders rather
than fee-earning and business development
? Increased pressure on cash
? Creditor and stakeholder management (e.g., HMRC, specialist
lenders, retiring partners seeking to withdraw equity)
? Squeeze on working capital
? Unsustainable/damaging reduction in debt
? People and retention issues
Effective working capital and cash management require the
development of specifc capabilities including:
? Building in fnancial management awareness including into
engagement letters
? Establishing ownership for fnancial management and creating
formal processes, supported with appropriate technology, to
communicate and manage ongoing costs of work in progress
? Understanding the benefts of improving working capital
and implementing operational measures as well as
coaching behavioural change to accelerate contract-to-
cash performance
? Modelling of trading/performance data
Consolidation in the market looks set to continue. Issues for frms
considering merger or funding options include:
? Conducting thorough market analysis to understand potential
merger strengths and weaknesses and likely synergies
? Assessing robustness of revenues and strength of
client relationships
? Considering key personnel and teams’ willingness to remain
with a frm post-merger
? Understanding long-term fnancial commitments in terms of,
for example, property
? Understanding the potential issues (e.g., exit timetable) that
may arise from securing alternative external funding (e.g.,
private equity)
For some, the conditions today are shaping up as a perfect storm,
for others they are creating opportunities to grow. But all frms
need to ensure that their approach to fnancial management can
evolve to take account of a marketplace that has signifcantly
changed. Whether they are considering a merger or are working
through a process to address fnancial stresses, having the optimal
approach to what EY call the Capital Agenda is critical.
Coming soon!
Look out for our next legal sector
insight paper in early 2014.
4 | Legal sector insight January 2014
Our proven track record
Our experience and knowledge of the legal sector is highlighted in
the following examples.
Project Gold
Client: £25mn turnover law frm
EY provided operational restructuring, modelling and debt
restructuring advice, managing negotiations with stakeholders
following cash shortfalls. A successful refnance was agreed with
core lenders on a sustainable basis.
Size of debt: £20mn
Project David
Client: Law frm
EY completed pre-acquisition due diligence as part of an
accelerated distressed sale process.
Target: UK law frm with £10mn turnover
Project Tavinor
Client: Lending bank
EY provided a review of working capital facilities and assisted with
a successful turnaround of the business and refnance.
Target: £15mn turnover multi-offce law frm
Size of debt: £5mn
Project Momentum
Client: Lending bank
Target: £15mn leading law frm
EY completed a review of a leading legal frm for the refnancing of
facilities, including a review of forecasts and WIP model.
Size of debt: £3mn
Project Apple
Client: Lending bank
EY performed an independent business review of a distressed law
frm, enabling the bank to deleverage.
Target: Midlands law frm
Project Club
Client: International property management frm
EY completed pre-fnancing due diligence in respect of a capital
contribution to a tenant.
Size of investment: £20mn
Tenant: International law frm with £200mn turnover
Project Snow
Client: International property management frm
EY completed pre-investment due diligence in respect of a
principal tenant.
Tenant: UK-wide law frm with £100mn turnover
Project Blue
Client: Global Professional Services Firm
EY evaluated the frm’s current performance across divisions,
assessing newly implemented IT systems in order to drive
working capital improvements and reduce WIP write off and
reporting accuracy.
Results: Realised an improvement in working capital equivalent
to 3% of revenues, over 12 months and improved monitoring and
reporting tools.
Why EY?
EY’s Transaction Advisory Services has extensive
experience of working with law frms, funders in the
sector as well as regulatory bodies. Our advice and
services help each of them to address the challenges
arising from a fast-changing legal market.
Whether assisting a frm in turnaround or working
with potential merger partners to achieve successful
integration, our experience spans the full range of
business, fnancial and operational issues that law
frms and their stakeholders will need to consider as
they adapt to the new realities of the legal market.
5 Legal sector insight January 2014 |
The Capital
Agenda
? Developing and implementing
turnaround strategies
? Liaising and renegotiating with funders
? Exploring tax options
? Investigating new sources of capital
and possible new corporate structures
? Due diligence for acquisition
and mergers
? Preparing for change
? Managing key personnel
? Managing clients
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Law frms and the Capital Agenda
? Working capital management
? Optimising contract to cash cycle
? Systems to support sound
fnancial management
? Tax structuring and optimisation
? Strategic and operational review
? Strategic and operational review
? Partner succession planning and
new equity fnancing
? Asset management
? Tax structuring and optimisation
The Capital Agenda
EY’s Capital Agenda provides a framework that can help
law frms to address many of the challenges they face —
as well as the opportunities. At the same time, using the
Capital Agenda can help funders, regulators and Partners to
understand the specifc fnancial conditions impacting law
frms and use those insights to develop strategic responses
to provide constructive support.
6 | Legal sector insight January 2014
Your EY contacts
To discuss any of the issues we mention in this paper please get in
touch with one of the contacts below:
Restructuring
Angela Swarbrick
Partner
+ 44 20 7951 4956
[email protected]
Fiona Taylor
Executive Director
+ 44 141 226 9077
[email protected]
Ben Wildsmith
Director
+ 44 161 333 2769
[email protected]
Working Capital
Jon Morris
Partner
+ 44 20 7951 9869
[email protected]
M&A
Mark Brockway
Executive Director
+ 44 20 7951 5272
[email protected]
Transaction Services
John Houlden
Partner
+ 44 121 535 2309
[email protected]
Valuation and Business Modelling
Adrian Nicholls
Partner
+ 44 20 7951 3853
[email protected]
Operational Transaction Services
Gary Turner
Partner
+ 44 20 7951 3311
[email protected]
7 Legal sector insight January 2014 |
About EY
EY is a global leader in assurance, tax, transaction and advisory services.
The insights and quality services we deliver help build trust and confdence
in the capital markets and in economies the world over. We develop
outstanding leaders who team to deliver on our promises to all of
our stakeholders. In so doing, we play a critical role in building a better
working world for our people, for our clients and for our communities.
EY refers to the global organization, and may refer to one or more, of the
member frms of Ernst & Young Global Limited, each of which is a separate
legal entity. Ernst & Young Global Limited, a UK company limited by
guarantee, does not provide services to clients. For more information about
our organization, please visit ey.com.
Ernst & Young LLP
The UK firm Ernst & Young LLP is a limited liability partnership registered in England and Wales
with registered number OC300001 and is a member firm of Ernst & Young Global Limited.
Ernst & Young LLP, 1 More London Place, London, SE1 2AF.
© 2014 Ernst & Young LLP. Published in the UK.
All Rights Reserved.
ED None
1379416.indd (UK) 01/14. Artwork by Creative Services Group Design.
In line with EY’s commitment to minimise its impact on the environment, this document
has been printed on paper with a high recycled content.
Information in this publication is intended to provide only a general outline of the subjects covered.
It should neither be regarded as comprehensive nor sufficient for making decisions, nor should it be
used in place of professional advice. Ernst & Young LLP accepts no responsibility for any loss arising
from any action taken or not taken by anyone using this material.
ey.com/uk
EY | Assurance | Tax | Transactions | Advisory
doc_914767135.pdf
Strategies For Survival, Strategies For Growth
Law frm fnances have been making headlines for the wrong reasons.
A further crunch point came in November 2013 when a worryingly
high number of frms across England and Wales were unable to secure
professional indemnity insurance and face potential action from the SRA.
This latest in a run of bad fnancial news for many frms confrms that a
tipping point is being reached across the legal industry. The impact of
changes in legislation, restricting referrals, changing fee structures and
the calculations of costs, are now also coming through the business cycle
to hit fees and proftability. For many frms the combined impact of these
developments is creating a well-founded sense of urgency.
Whilst the challenging economic climate has hit many frms hard, there are now these other factors
coming together to place additional strain on law frms’ traditional operational, fnancial and business
models. Regulatory developments including the Jackson Review of Civil Litigation and the Legal
Services Act are reshaping the commercial legal sector. A combination of technological developments
and outsourced business models are enabling some routine high-volume, low margin work to be
carried out in low-cost offshore jurisdictions by new types of legal service provider. Overall, the legal
sector looks to be undergoing a transformation that is structural rather than simply cyclical.
In this frst paper we consider some of the very timely and pressing business, operational and
fnancial challenges, as well as the opportunities, that EY’s extensive experience in the legal market
highlights as the most urgent that frms, and their stakeholders such as funders and regulators, will
need to address as they move forward in a fast-changing market.
Look out for our next legal sector insight papers in the coming months, which will consider how to
best manage the conficting interests of key stakeholders, how legal practices can evolve to ensure
they remain ft for business and what opportunities exist for those practices with funds available
for investment.
Strategies for survival, strategies
for growth
January 2014
Legal sector insight
Issue 1.0
2 | Legal sector insight January 2014
A market in transition
The Solicitors Regulation Authority (SRA) recently reported
1
that a high proportion of frms it surveyed were facing signifcant
fnancial stress, with more than 30 of the largest 200 frms in the
UK in fnancial diffculty. In its report the SRA pointed to a number
of practices associated with frms facing fnancial diffculty.
These include: an inability to measure or control fnancial
performance, excessive use of borrowing, weak processes for
collecting on bills and inadequate planning and due diligence for
acquisitions of other frms.
Those challenges accord with EY’s experience of working with
clients across the legal sector. Where we have been helping
frms in turnaround, for example, we are often seeing problems
that have arisen from high fxed costs as a result of expansion
strategies that made sense in the boom years. These are
accompanied by declining revenues as a consequence of both
general economic conditions and over capacity in the market.
On the other hand, we have worked with many frms that have
weathered the storm and are now exploring the opportunities to
grow and capitalise on market conditions.
Our work in the sector highlights that all key stakeholders,
i.e., law frms, lenders and regulators, need to ask some vital
questions about the approaches that will secure the best
outcomes for all parties.
? Lenders may need to review in detail their overall
understanding of their clients’ activities and funding in order to
achieve clarity on risks and the information needed to robustly
review current and future funding arrangements for the
longer term.
? The Regulator is currently very active owing to widespread
market stress and change and may need to ensure that it can
access the right advice to achieve solutions that will balance
the interests of frms and their lenders whilst protecting the
clients of frms.
? Partners should be seeking to review and plan suffciently in
advance of any potential problems in order to maximise the
fexibility and agility with which they are able to manage their
businesses through potentially tough times.
1 Navigating stormy seas: fnancial diffculty in law frms SRA, November 2013
3 Legal sector insight January 2014 |
Some key issues to consider
EY has worked with a number of frms to help them reorganise
and address stressed fnancial and business situations. None
has become insolvent or resulted in regulator intervention. Our
success in working with those frms has highlighted that any law
frm in turnaround will have to address multiple issues, including
organisational change, cash management, debt restructuring,
strategies to retain key personnel, negotiations with funders and
so on. Below we highlight some of the key issues we commonly
encounter and their implications.
Regulatory change arising from the Jackson Review and the Legal
Services Act:
? End of referral fees, pressure on revenues
? Changing costs regime
? New competition in the market for low-margin, high
volume work
? New corporate structures with non-lawyer owners/investors
create the potential for new corporate forms but raise
cultural challenges
Funders’ shrinking appetite and withdrawal from the market at
a senior, clearing bank level and also by secondary and tertiary
providers of fnance. Key consequences include:
? Partner time diverted to focus on managing funders rather
than fee-earning and business development
? Increased pressure on cash
? Creditor and stakeholder management (e.g., HMRC, specialist
lenders, retiring partners seeking to withdraw equity)
? Squeeze on working capital
? Unsustainable/damaging reduction in debt
? People and retention issues
Effective working capital and cash management require the
development of specifc capabilities including:
? Building in fnancial management awareness including into
engagement letters
? Establishing ownership for fnancial management and creating
formal processes, supported with appropriate technology, to
communicate and manage ongoing costs of work in progress
? Understanding the benefts of improving working capital
and implementing operational measures as well as
coaching behavioural change to accelerate contract-to-
cash performance
? Modelling of trading/performance data
Consolidation in the market looks set to continue. Issues for frms
considering merger or funding options include:
? Conducting thorough market analysis to understand potential
merger strengths and weaknesses and likely synergies
? Assessing robustness of revenues and strength of
client relationships
? Considering key personnel and teams’ willingness to remain
with a frm post-merger
? Understanding long-term fnancial commitments in terms of,
for example, property
? Understanding the potential issues (e.g., exit timetable) that
may arise from securing alternative external funding (e.g.,
private equity)
For some, the conditions today are shaping up as a perfect storm,
for others they are creating opportunities to grow. But all frms
need to ensure that their approach to fnancial management can
evolve to take account of a marketplace that has signifcantly
changed. Whether they are considering a merger or are working
through a process to address fnancial stresses, having the optimal
approach to what EY call the Capital Agenda is critical.
Coming soon!
Look out for our next legal sector
insight paper in early 2014.
4 | Legal sector insight January 2014
Our proven track record
Our experience and knowledge of the legal sector is highlighted in
the following examples.
Project Gold
Client: £25mn turnover law frm
EY provided operational restructuring, modelling and debt
restructuring advice, managing negotiations with stakeholders
following cash shortfalls. A successful refnance was agreed with
core lenders on a sustainable basis.
Size of debt: £20mn
Project David
Client: Law frm
EY completed pre-acquisition due diligence as part of an
accelerated distressed sale process.
Target: UK law frm with £10mn turnover
Project Tavinor
Client: Lending bank
EY provided a review of working capital facilities and assisted with
a successful turnaround of the business and refnance.
Target: £15mn turnover multi-offce law frm
Size of debt: £5mn
Project Momentum
Client: Lending bank
Target: £15mn leading law frm
EY completed a review of a leading legal frm for the refnancing of
facilities, including a review of forecasts and WIP model.
Size of debt: £3mn
Project Apple
Client: Lending bank
EY performed an independent business review of a distressed law
frm, enabling the bank to deleverage.
Target: Midlands law frm
Project Club
Client: International property management frm
EY completed pre-fnancing due diligence in respect of a capital
contribution to a tenant.
Size of investment: £20mn
Tenant: International law frm with £200mn turnover
Project Snow
Client: International property management frm
EY completed pre-investment due diligence in respect of a
principal tenant.
Tenant: UK-wide law frm with £100mn turnover
Project Blue
Client: Global Professional Services Firm
EY evaluated the frm’s current performance across divisions,
assessing newly implemented IT systems in order to drive
working capital improvements and reduce WIP write off and
reporting accuracy.
Results: Realised an improvement in working capital equivalent
to 3% of revenues, over 12 months and improved monitoring and
reporting tools.
Why EY?
EY’s Transaction Advisory Services has extensive
experience of working with law frms, funders in the
sector as well as regulatory bodies. Our advice and
services help each of them to address the challenges
arising from a fast-changing legal market.
Whether assisting a frm in turnaround or working
with potential merger partners to achieve successful
integration, our experience spans the full range of
business, fnancial and operational issues that law
frms and their stakeholders will need to consider as
they adapt to the new realities of the legal market.
5 Legal sector insight January 2014 |
The Capital
Agenda
? Developing and implementing
turnaround strategies
? Liaising and renegotiating with funders
? Exploring tax options
? Investigating new sources of capital
and possible new corporate structures
? Due diligence for acquisition
and mergers
? Preparing for change
? Managing key personnel
? Managing clients
P
r
e
s
e
r
v
i
n
g
c
a
p
it
a
l O
p
t
im
i
s
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n
g
c
a
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a
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a
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a
p
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t
a
l
I
n
v
e
s
t
i
n
g
c
a
p
it
a
l
Law frms and the Capital Agenda
? Working capital management
? Optimising contract to cash cycle
? Systems to support sound
fnancial management
? Tax structuring and optimisation
? Strategic and operational review
? Strategic and operational review
? Partner succession planning and
new equity fnancing
? Asset management
? Tax structuring and optimisation
The Capital Agenda
EY’s Capital Agenda provides a framework that can help
law frms to address many of the challenges they face —
as well as the opportunities. At the same time, using the
Capital Agenda can help funders, regulators and Partners to
understand the specifc fnancial conditions impacting law
frms and use those insights to develop strategic responses
to provide constructive support.
6 | Legal sector insight January 2014
Your EY contacts
To discuss any of the issues we mention in this paper please get in
touch with one of the contacts below:
Restructuring
Angela Swarbrick
Partner
+ 44 20 7951 4956
[email protected]
Fiona Taylor
Executive Director
+ 44 141 226 9077
[email protected]
Ben Wildsmith
Director
+ 44 161 333 2769
[email protected]
Working Capital
Jon Morris
Partner
+ 44 20 7951 9869
[email protected]
M&A
Mark Brockway
Executive Director
+ 44 20 7951 5272
[email protected]
Transaction Services
John Houlden
Partner
+ 44 121 535 2309
[email protected]
Valuation and Business Modelling
Adrian Nicholls
Partner
+ 44 20 7951 3853
[email protected]
Operational Transaction Services
Gary Turner
Partner
+ 44 20 7951 3311
[email protected]
7 Legal sector insight January 2014 |
About EY
EY is a global leader in assurance, tax, transaction and advisory services.
The insights and quality services we deliver help build trust and confdence
in the capital markets and in economies the world over. We develop
outstanding leaders who team to deliver on our promises to all of
our stakeholders. In so doing, we play a critical role in building a better
working world for our people, for our clients and for our communities.
EY refers to the global organization, and may refer to one or more, of the
member frms of Ernst & Young Global Limited, each of which is a separate
legal entity. Ernst & Young Global Limited, a UK company limited by
guarantee, does not provide services to clients. For more information about
our organization, please visit ey.com.
Ernst & Young LLP
The UK firm Ernst & Young LLP is a limited liability partnership registered in England and Wales
with registered number OC300001 and is a member firm of Ernst & Young Global Limited.
Ernst & Young LLP, 1 More London Place, London, SE1 2AF.
© 2014 Ernst & Young LLP. Published in the UK.
All Rights Reserved.
ED None
1379416.indd (UK) 01/14. Artwork by Creative Services Group Design.
In line with EY’s commitment to minimise its impact on the environment, this document
has been printed on paper with a high recycled content.
Information in this publication is intended to provide only a general outline of the subjects covered.
It should neither be regarded as comprehensive nor sufficient for making decisions, nor should it be
used in place of professional advice. Ernst & Young LLP accepts no responsibility for any loss arising
from any action taken or not taken by anyone using this material.
ey.com/uk
EY | Assurance | Tax | Transactions | Advisory
doc_914767135.pdf