It has been reported recently that the majority of PI firms have not yet decided on a strategy to deal with the upcoming reforms due at the end of May 2021. These deal with whiplash cases while also increasing the small claims track levels for Road Traffic Accident (RTA) claims generally, making smaller road traffic claims significantly less profitable. The similar proposed changes to the small claims for non-RTA work do not (as yet) have an implementation date but should be planned for all the same.
Those firms affected ostensibly have two choices to deal with forthcoming changes in the market when considering their portfolio of smaller cases:
- Continue with smaller claims but make them profitable with automation. Sustainable profitability is unlikely to be able to be achieved by simply pushing more of the work onto lower cost paralegal staff, given the costs of supervision and continued time costs for each matter;
- Exit smaller claims work entirely; or
- Implement strategic M&A to diversify with unaffected claims work such as clinical negligence, or to firms with more automated workflows and supporting technology.
Also, post-Legal Aid, Sentencing and Punishment of Offenders Act 2012 (LASPO) claims could cause big liabilities for some firms. These claims are being made against PI firms who allegedly incorrectly took cost monies out of clients’ damages on closed matters since the reforms in 2013 – some firms will inevitably have to pay back cost deductions from damages.
This all comes at a time when additional challenges are facing PI firms due to the Pandemic, with fee earner productivity negatively impacted by sickness, school closures and additional caring responsibilities, firms may struggle to achieve previous levels of Work in Progress (WIP) and disbursement recovery. This is exacerbated by clients chasing more to accelerate their damages. Lockdowns have now been proven to not be an excuse to miss court deadlines, so delays in proceedings risk lost cost recovery and additional costs being incurred to resolve issues.
Strategic opportunities to combat these challenges
Mergers and acquisitions are only a worthwhile solution if existing WIP is true and healthy and the strategy fits; for example, if the merger creates cost synergies, diversification or improved branding. This can be a successful approach if taking on a firm that is known for high-value work to grow market share or for non-portal work types such as clinical negligence that aren’t currently impacted by upcoming changes.
Given paying for referrals is now blocked, successful firms will invest in building their brand in terms of name recognition, client trust and recommendation levels such as through TrustPilot and via search engine optimisation. This will enable a strategic focus on:
- Cross-selling private client services – building enduring relationships with clients to become their go-to firm. The firms that can build this brand and cross-sell effectively will reap profitability benefits from reduced client acquisition costs and improved brand awareness as these clients make their own recommendations. This involves a greater focus on client satisfaction and closely tracking Key Performance Indicators (KPIs) such as TrustPilot scores.
- Making smaller claims profitable with automation - although it creates an upfront cost, investment in technology is a route to success, minimising touchpoints on each matter. This involves building easy-to-use web portals for clients and minimising client contact. With implications on client care, this needs to be done properly but does provide an opportunity for excellence in processes, minimising human error and missed deadlines. Given staff to client ratios are likely to adversely impact customer service with clients having to talk to numerous different members of staff, branding and the ability to escalate and deal with client issues will become increasingly important.
- Improves the ability to diversify - a logical move could be into the non-PI claims market such as financial mis-selling claims to recover lost income from small PI claims work. Brand recognition and trust levels would enable swift competition with claims management companies. Firms may be able to also successfully pivot teams into non-claims work that is similarly process or regulation-driven, such as debt-chasing services.
Solutions to profitability, lockup and financing issues
A change in funding models is likely to be required if firms are moving away from smaller PI matters – with a mix of small and large cases, firms benefit from a portfolio effect that ensures continual rather than lumpy cash-flows. Removing ‘little and often’ receipts from the mix causes a significant funding requirement. Lockup days could move on average from months to years and consequently this needs to be funded properly. With many firms in overdrafts and with significant bank loans, this will be a challenge.
Instead of going straight to banks to provide additional term debt, options exist around the following that may better suit the firm and its clients:
- Cost advance funding (CAF) – after point of win, fees can be confidentially advanced to enable access to the cash while costs are being negotiated, which takes on average three months on multitrack files
- Disbursement cost funding (DCF) – a confidential advance to the firm for paid disbursements
- Disbursement funding – this is growing in popularity, following high take-up across PI firms in other countries like Australia. Disbursement funding deals with the decreasing expectation that law firms should fund clients. It is a loan to the client, taking the funding requirement for disbursements away from the firm entirely. The interest cost is intended to be covered by the cost claim so paid by the defendant when won, as long as the interest cost is not excessive. There are implementation complexities; the firm would need to negotiate with their ATE provider to cover the interest on losing matters – but at a higher premium to the client. Retainers would also need adjusting and client messaging needs to be considered.
There are also likely to be improvements that can be made internally to significantly improve cash levels - we have independently reviewed lockup in PI firms and have identified and delivered simple improvements to fee earner and finance processes to unlock cash, including:
- Amending the paid disbursement client to office transfer (PDCTO) processes to recover cash much earlier – retainers allowing, paid disbursements are recovered from client money, enabling an improvement in lockup as these payments are recouped at point of damages rather than months later for multitrack claims.
- Implementing a finance process where after the event (ATE) insurance claims are recorded as a receivable at point of claim acceptance, to boost the balance sheet and ensure the funds are effectively chased to improve lockup. Most firms post the ATE claim when it is received as cash, leading to reduced visibility and a gap between financial and matter records.
In any event, firms should review retainers to ensure that reasonable time costs, plus disbursements, expenses and interest, are able to be taken from interim damages.
We continue to be surprised by the sheer volume of firms that do not know how profitable their work actually is, to be able to target improvements. Data analytics and visualisation tools now enable full activity-based costing to be completed, rather than a high-level view of hourly rates and WIP lists. Leaders need to know, by work type and fee earner: success rates, WIP and cost recovery rates and lockup days split into their constituent process parts (such as timeframes for costing and payment once agreed). There also needs to be ongoing performance management against cost budgets: no time should be written off if the fee earner is working productively.
Reducing costs generally (and costs to serve clients in particular) should also be a key focus to ensure firms are run as leanly as possible to remain competitive.
Also, firms should step back and review commercially how matters are being run in practice. Fee earners often deviate in minor but impactful ways from procedures and leaders need to ensure processes are followed and optimised to minimise the time from WIP to cash and maximise the recovery. For example, ensuring part 36 offers are made where possible as standard, not only to improve recovery but also to push defendants to settle earlier.
This includes a focus on identification and prompt action on files with low chances of success to ensure the recovery of disbursements through ATE policies and avoid further unrecoverable time costs in supervision and ongoing client contact.
It is not all doom and gloom. Indeed, there are many options available and an independent review can provide valuable insight.
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.
This article was previously published on Smith & Williamson prior to the launch of Evelyn Partners.