U.K. lawyers fear that the coronavirus pandemic will have a major impact on firm’s financial positions due to the likelihood of lengthening lock-up, as clients struggle to maintain their own supplier commitments.
In a survey of 60 top lawyers by Law.com International’s U.K. arm, Legal Week, roughly twice as many respondents said firms’ lock-up – the time it takes between advising clients and being paid – will be lengthened, as opposed to those who said there would be no major effect.
One respondent said that the payment of legal fees “will be low on the priority list for some clients”, as they grapple with the challenges faced by their own businesses.
Smith & Williamson head of professional practices Giles Murphy agreed, and told Legal Week that clients will be likely prioritising paying other suppliers, such as IT, who are being relied upon to keep organisations running on a daily basis.
Speaking about the potential impact of the pandemic on the legal sector, Murphy said that the starting point for the industry’s concerns around lock-up stems from the low amount of cash kept within legal businesses.
“If there is any cash to spare,” he says, “It gets paid out to partners as soon as possible. And that’s an absolutely fine thing to do in an easy, predictable economy like the one we’ve had recently. But even last summer we were thinking about the potential impact of things like the U.K. general election and Brexit being a jolt to the [economic] system.
“Of course, not even we predicted a virus pandemic, but that’s exactly the type of jolt we thought firms would have to deal with sooner or later. There are currently a lot of firms with cash on their balance sheet that is less than the balance they need to pay wages.”
Analysis published by Legal Week and compiled by Smith & Williamson last year showed that at the end of the 2018 financial year, the top 50 U.K. law firms were waiting to be paid a total of £5.6 billion in unpaid client invoices between them. This left them with only about £450 million in net cash, when bank loans and overdrafts were taken away from cash balance.
Over the same period, clients took on average 121 days to pay U.K. top 50 firms.
Another survey respondent said that they expect there to be a reasonably large impact on their lock-up as clients view law firms as low-priority for getting paid at the moment, with suppliers like IT companies taking precedence. But the lawyer acknowledges that their firm “will be doing the same with our own creditors as well”.
Murphy recommends that firms facing difficulties talk to a bank about what additional facilities can be put in place to give the firm some breathing room – but emphasises that this would need to be done sooner rather than later.
The U.K. government recently announced that it would defer value-added tax (VAT) bills while the pandemic continues, easing some of the pressure on cash flows.
A London-based legal recruiter said the measure has been gratefully received by firms.
“The government introducing VAT holidays has been incredibly welcomed by law firm management we have spoken to — WIP can be deferred now, which will help their financial positions. So the true impact is unlikely to emerge until next year and in the following years,” he said.
The impact of the crisis on bonuses and redundancies are also high on lawyers’ agendas, according to the Legal Week survey.
The majority of respondents to the poll said that they expect bonuses either to be much smaller for the coming year, or to not be paid at all across any level of seniority.
And as well as an expected short-term impact on bonuses, many lawyers fear the pandemic disruption could have longer term affects on job safety.
The majority of lawyers said that they expect redundancies, with 47% of respondents saying that they expect firms to review support functions and look to “trim excess fat”. Another 30% added that they predict firms will undergo a “dramatic restructuring of their practices”.
As well as individual cuts and practice restructurings, nearly 56% of lawyers expect firms’ global footprint could take a hit, and that their least profitable offices are likely to to be permanently shuttered in the coming weeks and months.
Murphy added: “In an environment where we’ve been talking endlessly about the war for talent, are firms now going to start shedding that staff? If the impact of this carries on for months, they may well do. If the impact is going to be short lived, maybe it won’t. But in such an uncertain environment, law firm leaders may eventually be forced to make that call.”