Recession has inevitably altered the relationship between banks and law firms. And as Jane Galvin says, this is no bad thing
The subject of how law firms have weathered the recession has already been well-documented. Many firms have been forced to restructure through redundancy programmes, diversion of resources away from the worst-hit practice areas and deferment of graduate entries.
The most successful law firms have taken financial management to the next level, focusing closely on cash by employing more robust liquidity management and becoming more astute in managing the capital within the firm, with the best-run practices emerging from the recession operating far more lean and agile business structures. However, as the economy improves
caution is still needed, with particular awareness of such dangers as overtrading and overgearing.
Another change that has been necessary is the relationship between firms and their banks. The banking industry, in the aftermath of the credit crunch, is very different to how it was two years ago. To some extent this assertion can also be applied to law firms and the legal sector as a whole, and as a result of these changes in both the banking and legal industries the relationship between law firms and banks has evolved.
It is fair to say that law firms have historically been viewed by banks as relatively immune to downturns in the economy. In part this was due to the unlimited liability of the partners under the old partnership structures, so there was a significant incentive to ensure the business survived.
The legal sector as a whole has seen high levels of profitability and double-digit income growth as the norm since emerging from the recession of the 1990s (with the exception of a slight dip in both profitability and income when the dotcom bubble burst).
This has always been achieved without necessarily having to operate the same levels of strategic planning and business management that other industries have had to operate to enjoy similar levels of success.
The lessons learnt from the recession have caused this view to be amended slightly, driven by a significant rise in banks’ impairment charges for the sector among the smaller high street firms and a modest rise in the number of larger commercial firms requiring closer attention. As a result banks are now looking far more closely at how a business is operating on all levels, including work-in-progress, debtor days, partner drawings, balance sheet discipline, forecasting, budgeting, succession planning etc.
Similarly, law firms are also viewing banks with more caution than before, thinking that their money and clients’ money may be at risk. However, due to government guarantee schemes and significantly improved capital ratios, this risk is extremely unlikely. Firms have also realised that previously accessible on-demand facilities may be removed as banks’ cost of funds has risen, causing a necessary tightening of their lending propositions.
This has led to a change in borrowing behaviour, with firms now increasingly seeking committed facilities rather than ’on demand’ so as to remove the potential threat of these facilities being taken away.
While this behaviour of spreading deposits between banks and opting for more secure facilities demonstrates a move towards more prudent risk management, it is important that firms are aware that they may be able to get better deals in terms of pricing from their banks if they have proportions of both deposits and debt with the same institutions.
Law firms remain highly valued customers to banks, especially now with the focus on banks’ liquidity. All banks are focusing more upon the extent to which they are funding their loan books through client and wholesale deposits. Conversely, firms are increasingly viewing banks in more of a consultant capacity than before, working together to implement solutions such as multi-currency pooling and electronic banking in order to improve process and liquidity efficiency.
The relationship between banks and law firms is slightly different and probably more balanced as we emerge from recession, but no less positive, and no less important. It is imperative to always maintain a good relationship with your bank rather than waiting until you need one; and to be aware that, whether it is good or bad news, always consider your bank as a partner in finding a solution.
Jane Galvin is head of professional services at Barclays