Large law firms are reducing payments to partners in a clear sign the sector is struggling with the uncertainty of the coronavirus pandemic.
While the most prominent law firms have the cash reserves to mitigate the damage – at least for a while – many small and medium-sized firms are in a precarious position. We take a look at the risks to law firms and how data can help manage those risks.
Coronavirus Impact on Law Firms
Without contracts to review, property transactions or court hearings, lawyers are left twiddling their thumbs. Most law firms rely on economic activity to generate client work and fees and when that activity grinds to a halt, law firms stop billing. Those servicing the retail, hospitality and leisure sector are facing a worrying time as these sectors are unlikely to return to pre-pandemic trading for many months or years.
While firms can furlough staff until the summer and defer VAT to keep the business ticking along, that support will likely evaporate by the end of summer at the latest. Public sympathy – and subsequently government support – will probably focus on low-paid hospitality and retail workers, leaving law firms to battle on independently.
Good solicitors are expensive, so most law firms have a hefty wage bill. While employees may accept that market forces necessitate a lower salary, the best solicitors are unlikely to accept a big hit to their income. To keep their top performers, law firms will need to keep paying competitive salaries or risk losing their best talent.
Social distancing measures are restrictive for law firms operating normally. A case in point is the law regarding witnesses signing a deed – witnessing a signature over video link is probably insufficient, and case law has provided little definitive certainty. Law firms are left to wrestle with this complexity and uncertainty.
A Changing Market
In previous decades law firms were incredibly effective at keeping fees and margins extremely high – technology was starting to change this long before COVID-19 escaped from Wuhan.
Legal tech is booming: investment in the sector increased by over 700% in 2019, and it’s changing how firms operate. While the Magic Circle firms won’t be upending their business models immediately, they know change is coming.
One example is Lexoo – a marketplace for solicitors to help firms circumnavigate the chunky fees charged by conventional firms.
The emergence and increasing sophistication of AI allows difficult jobs to be completed faster and more efficiently. Although this will save law firms lots of time, that’s probably not what they want – their model of hourly billing for simple, but time-consuming tasks was raking in cash.
As consumers wise up to the technology available, they’ll either demand law firms lower their prices accordingly or they will start using the technology directly. As businesses look to cut costs in the coming recession, these trends are more likely to accelerate.
And it doesn’t end there: a burgeoning legal tech sector is setting its sights on every facet of the industry. Take a look at the raft of new entrants here.
How Data Can Help
In an increasingly challenging and competitive landscape, data can give law firms a critical competitive advantage. At Red Flag Alert, we help firms protect their existing income streams and create new ones.
In the current climate, it’s more important than ever to improve credit control. With many law firms already experiencing long cycles between invoicing and payment, the spectre of bad debt is never far away. Red Flag Alert offers detailed financial health ratings on every UK business, providing insight on clients that are facing insolvency and presenting a heightened credit risk. This allows credit control teams to focus on the riskiest outstanding invoices.
Most law firms win business based on brand and referral. Although this approach can keep the pipeline flowing for many years or decades, it is fragile and ignores a world of opportunity. Red Flag Alert’s Prospector tool allows law firms to target ideal clients at the right time.
With detailed information on every UK business and 100,000 updates every day, Red Flag Alert has the business intelligence you need to get an edge.
Find out more about how Red Flag Alert’s KYC AML platform could improve your AML compliance programme and safeguard your business from financial crimes and reduce AML risk, Try Red Flag Alert today.