UK 200: Financial management

 As Tom Wood, head of professional services industry at Barclays, says, “Economic conditions remain tough, meaning law firms’ clients are also looking for ways to help their cash-flow and therefore could be taking longer to pay. Finding the right balance of client relationships and cash collections is paramount for firms.”

The good news is that The Lawyer’s data on lockup shows that many firms are rising to those challenges. Frankly, while the market trend may be towards longer lockup there have been some stunning performances this year, many of which are included in the UK 200.

And, as with the other key metrics this year, they are fully digitised, enabling firms to compare themselves with their peers on WIP, debtor days and total lockup. 

To purchase access to the full report visit www.thelawyer.com/uk200 or contact Daniela Badcock on +44 (0) 207 970 4582

Big four focus on efficiency

Allen & Overy (A&O) is the only one of the UK’s big four to have provided data on lockup. A&O’s lockup target last year was 120 days and at the end of the 2012/13 financial year it missed this by six days, posting 37 days of WIP and 89 debtors.

While missing target, this reflects both an improvement on A&O’s 129-day year-end average in 2011/12 and its increasing efficiency, highlighted by the beefing up of its Belfast support services centre.

Both WIP and debtor days at Eversheds fell at the end of last year. The number of days’ WIP dropped from 54 in 2011/12 to 45 last year, while debtor days came down by three, to 61. This meant Eversheds beat its 110-day lockup target by four days and was comfortably under the 118 achieved in 2011/12.

Simmons has the lowest year-end lockup in this group, with 97 days in total, made up of 25 days’ WIP (also the lowest in the group) and 72 debtors.

The speed with which several of this group are converting bills into cash is evidence that many firms are now considerably more efficient than they were five years ago.

Taylor Wessing’s lockup was 105.9 days (19.9 days’ WIP and 86 debtors), Eversheds’ lockup is 105 days (45 WIP and 61 debtors), identical to Pinsent Masons’ (31 WIP and 74 debtors) while Bird & Bird and Berwin Leighton Paisner’s are both 113 (41 and 72) and 113 (31 and 83).

The outlier in the group is CMS, where lockup was 156 days (75 and 81) and the brace of litigation and insurance-heavy firms, DAC Beachcroft (161 days’ lockup consisting of 71 days’ WIP and 90 debtors) and DWF (124, 58 and 66), which was six days inside its 130-day lockup target.

Barclays’ Wood has seen first-hand the efforts firms have been making to improve lockup.

“More than ever, firms and their fee-earners need to be aware of the importance of focused lockup management,” he says. “Cash collections have to be a priority for everyone as lenders and regulators look more closely at the borrowing levels of firms. A simple improvement of a few debtor days can result in considerable reductions to working capital line dependency.”

And, as Wood says, the firms leading the way in terms of lockup management are effective in incentivising their fee-earners to prioritise cash collection.

“The ability to convert WIP into cash is made a key performance metric for individuals in those firms, with financial reward dependent upon it,” he continues. “Lockup management is an end-to end process, starting at the point of first contact with a potential client.”

The long view

While a one-year snapshot of a firm’s financial management data is illuminating, what really tells the story is the longer term picture.

We took a sample 25 of the firms that provided data in 2009 and also did in 2012/13. The most significant reductions in total lockup over the five-year period among the The Lawyer’s sample firms came at DWF, Kennedys and Bond Pearce, which respectively shaved 33, 32 and 30 per cent off their total lockup. DWF has done this by radically improving its WIP, cutting the year-end position by 51 per cent since 2009.

DWF chief financial officer Alex Hodgson said that when the firm set itself the goal of becoming a top 30 firm by 2012 and then a top 20 firm by 2015 (a goal, incidentally, that it has achieved two years ahead of schedule thanks to a series of mergers) it knew that to scale up at that pace it needed to be operating from a strong and sustainable fin-ancial platform.

“We put in place a series of measures that are now paying dividends, helping us deliver significant operational efficiencies,” says Hodgson. “Key changes have included putting in place an experienced team of operational finance specialists which has allowed us to take much of the administrative burden away from partners, fee-earners and secretaries and put it in the hands of a central team of finance professionals. In this way we’re able to provide a more proactive service to partners, pushing bills as client terms determine they are due, rather than waiting for a pull from fee-earners. We also work closely with clients to agree service level agreements that best suit their needs and their need for efficient financial management, as well as our own.”

Conversely, adds Hodgson, DWF has also tried to automate as far as possible all activities that are process-driven and do not need specialist knowledge to run effectively.

“We set ourselves tough financial targets and we’re still driving through measures to support this, so we expect to see further operational efficiencies going forward to support growth,” he concludes.

Back in 2009 Osborne Clarke was already one of the UK market’s most efficiently run firms, with a
total year-end lockup of just 95 days. Since then it has shaved off another 16 per cent, taking total lockup for 2012/13 down to just 79.5 days.

As Simon Beswick, Osborne Clarke managing partner, says, “working capital management is a key component of running our business efficiently, which has benefits for our clients as well as those in the business. Our success in running it as tightly as we do lies equally with the importance we place on it and an understanding with our clients on the basis on which we will bill for our services and be paid for them”.

Lockup keepers

On the flipside Olswang, TLT and CMS have all seen double-digit increases on total lockup, with the latter seeing it rise by 13 per cent, Olswang seeing it go up by 18 per cent and TLT registering a 39 per cent increase since 2009.

Duncan Weston, the managing partner of CMS’ UK member firm CMS Cameron McKenna, says that over the past two to three years, partly helped by the central hub back office system deal the firm has with outsourcing giant Integreon, CMS has significantly upped its focus on working capital management.

“It’s an area we’re really focusing on,” says Weston, “we’re getting much tighter in this area. We’ve got much better controls over write-offs and the risk profile of matters has come down significantly. That translates into better lockup.”

In terms of efficiency this is a positive message, but CMS is not there yet. Indeed, last year’s total lockup was a long way off that aggressive target, with year-end average WIP rising from 62 in 2011/12 to 75, and debtors also rising from 69 to 81 days. Weston, however, argues that these figures are “not reflective of the trend” as there was “more WIP in system” during 2012/13. Certainly, the trend at CMS is to target better financial management, something reflected in its hugely ambitious lockup target of just 61.

Olswang chief operating officer Simon Glynn recognises that rising lockup is a trend both in his firm’s peer group (pointing out that the most recent PwC survey shows Olswang’s total lockup in line with firms in the 11-to-25 and 26-to-50 categories) and the wider market.

“Lockup management is a priority for me and we’ve taken initiatives to target a decrease in our total lockup, with a specific focus on debtor days,” adds Glynn. “To achieve this we’ll continue to invest in growing our finance team and are concentrating on building up our credit control function and improving our understanding of clients’ accounts payable and settlement processes.”

As for TLT, the firm admitted that its significant growth in recent years along with changes to fee and billing structures were the primary drivers of its increased lockup since 2009. It also recognised the impact of the harsher trading environment, noting that, like all businesses during a market downturn, there will likely be changes to payment terms that will affect debtor days. But the primary reason for TLT’s longer lockup is the significant growth, powered by acquisitions, it has seen recently.

“Our national expansion over the past four years, with new offices in Scotland, Northern Ireland and Manchester, inevitably means more work and more WIP,” confirms TLT managing partner David Pester. “As part of our expansion plans we’re winning an increasing amount of complex, larger-scale litigation work, particularly for financial services sector clients. At the same time, we’ve seen an increasing percentage of commercial litigation work using alternative funding structures and involving conditional fee arrangements. Project fee structures in non-contentious transactional areas are also changing and are now frequently linked to key milestones rather than regular monthly billing.”

Pester insists that his firm anticipated and planned for these changes as part of its growth strategy and is now “managing all our financial metrics, including lockup, as we continue to expand”.

He knows as well as anyone the importance of getting bills out before year-end and paid as quickly as possible. It is a pressure that is not going away.

What is WIP?

Work in progress (WIP) is the term used to describe a matter that is underway, but for which the client has not been billed; debtor days reflect the length of time it takes a firm to collect money from the client once the bill has gone out; and lockup describes the total time involved in the process.

This year more firms than ever before, a record 137 of the UK’s top 200, provided figures revealing their year-end WIP and debtor day levels. Most also provided data on the lockup target they hope to achieve.

This is the data that really shines a light on how financially robust a firm is and how well it is managed. And nowhere else can attributed lockup data be found than in the UK 200.

wip table

To purchase access to the full report visit www.thelawyer.com/uk200 or contact Daniela Badcock on +44 (0) 207 970 4582