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NatWest’s 2021 assessment of solicitors, reflects on an extraordinary 12 months and looks to the challenges and opportunities ahead. The report’s author, Robert Mowbray, and NatWest’s head of professional services, David Weaver, discuss the key themes.
Last updated: 19 May 2021 7 min read
How is this year’s report different from previous years?
David Weaver: “We wanted to focus on how the sector performed through the pandemic by reviewing the management information of a smaller sample. It is less data-led and more discursive. However, firms can still use these findings to target areas of improvement, with the aim of enhancing profitability and management of working capital.
“We have also included a future-proof checklist, which we hope will give you a useful framework to help navigate challenges and leverage new opportunities to pivot, innovate and grow your business.”
The report shows an increase in partner profit while fee income fell. What accounts for that?
DW: “Critically, this is consistent with the conversations we’ve had with our customers throughout the past 12 months. And there are two factors at play. First, most firms took advantage of the government support that was offered, such as the loan schemes, deferred tax payments and furloughing of staff. This last measure – particularly the furloughing of non-fee-earning staff – reduced costs and helped firms avoid a lot of redundancies so that they were sufficiently resourced when the uptick came. The second factor was various self-help measures firms initially took, such as cancelling non-critical spending, which included reducing contractors and consultants and deferral of dividends, bonuses and drawings.”
Robert Mowbray: “The drop in income is not surprising given the disruption in the economy. But we didn’t know what impact there would be on profit, which has increased because expenses went down, with the highest cost being salaries. Managing partners have said how grateful they were for the furlough scheme because it gave them time to think about what to do, and they didn’t panic and make lots of redundancies – that would have caused longer-term damage. But other costs, such as travel, business development and office utility costs, dropped, too.”
During the pandemic, how have different-sized firms fared?
DW: “Smaller firms struggled more in the immediate transition to work from home and weren’t as prepared as the larger ones, but they quickly resolved the technology challenges. The other main area of difference was around lock-up, and smaller firms experienced a more significant deterioration. That could be because they initially had to focus on tech challenges, securing government support, and liquidity, as a priority.”
“The sector has remained highly resilient despite initial fears around liquidity. The report shows that around 90% of firms are either optimistic or very optimistic about the future. And it is encouraging that we’re starting to see some real change coming” David Weaver, head of professional services, NatWest
RM: “The type of work is worth looking at, too. There were massive swings in volumes of work, depending on what firms did. Residential conveyancing [initially] fell off a cliff as we went into lockdown. Many feared those departments would disappear, but it became the best-performing area of many firms when the lockdown eased. Equally, employment lawyers got very busy just before lockdown because there were fears businesses would make a lot of redundancies, and the furlough scheme stopped it. But other areas, such as insurance work around the travel industry, have struggled. So work type has determined outcomes more so than size.”
How has the pandemic forced firms to change their business model?
DW: “Working from home is the obvious change. We’ve heard a lot about the challenges around training, culture and well-being. The concern is that if you entirely remove the common experiences at work that bind people together, then a firm’s culture might start to erode.
“Firms are looking at their models and the right funding mix. They’re thinking: ‘Is it right to have a full distribution model, or to be more conservative and retain more value in the business?’”
RM: “Many firms haven’t done anything radical yet, and changes that have happened so far are not the end of it; there will be more iterations of changes. But what people are thinking a lot about is staff retention and whether they have secured staff loyalty. The moment everyone feels safe and can go back to work, that loyalty may be tested.
“Firms are also thinking about how they do business development in the future, with less travel and fewer people in the office for face-to-face client interaction. Business development will probably take a more blended approach, and firms are getting more creative.”
In what shape is the legal sector to manage the next 12 months?
DW: “The sector has remained highly resilient despite initial fears around liquidity, particularly around some of the smaller, less diverse high-street firms. The report shows that around 90% of firms are either optimistic or very optimistic about the future. And it is encouraging that we’re starting to see some real change ahead.”
RM: “All the cash that both businesses and individuals have put away over the past year, a lot of firms feel it will be spent. However, I think they are in a strong position, and a lot of them have got money to invest, so it’s about taking the right opportunities.”
In the light of the pandemic, are firms more likely to reserve cash?
RM: “Much of the cash from emergency funding hasn’t been spent; it’s been there as a buffer. More partners now understand the cash-flow side of their firm and are more cautious; they’re prepared to defer distributions. And I think they’re doing the right things.”
“Some firms noticed during the pandemic that price was not an issue to clients. What mattered was quality and speed of service” Robert Mowbray, author, A Year Like No Other
DW: “In every report, we always encourage firms to retain more cash to withstand any shocks, so it is pleasing that, given this year is a one-off, many CBILS [Coronavirus Business Interruption Loan Scheme] were drawn but not yet utilised. It acts as a healthy safety net and allows them to take advantage of any investment opportunities.
“It would be interesting to see what happens because many of the larger short-term deadlines are almost up for expiry. So we’re starting to have conversations with firms around what their optimal capital structure is, going forward. Do they want to pay for additional liquidity lines now to ensure they have it?”
What are the takeaways firms should consider from the report?
RM: “Some firms noticed during the pandemic that price was not an issue to clients. What mattered was quality and speed of service. So maybe law firms can be more robust with clients going forward and say: ‘Actually we do need some money upfront, and we will bill you monthly for the vast majority of the work we do,’ and that would improve lock-up and cash flow. And, I think it’s making sure the partners have the appropriate amount of capital in the firm in the first place, and as firms get bigger, introducing more. So I think retention of some profit will become more common. But I don’t think firms want to be awash with cash, so there is a balance in this.”
DW: “On top of that, many [of the research respondents] would recommend holding three months’ expenses in cash as a best practice for firms.
“We’ve compiled a future-proof checklist in the report, covering a broad range of considerations for firms to think about as they look to the future. These include staff engagement opportunities, client attraction and engagement factors and thoughts about making the best use of the office/new working patterns. While individual firms will find different solutions to these issues, we see these as areas of focus applicable to all legal firms.”