While the pandemic has severely affected most businesses, each sector has experienced different challenges, specific to their industry. Andrew Hosking, head of professional practices, looks at trends in the professional services sector, and explains the impact of coronavirus on its firms, and what action they can take, to address the issues facing their business.
The use of data analytics − digitisation − to improve working practices has been influential in the industry. Also, the growing trend of higher global incomes and the need for more insurance and legal services is having a positive impact.
Cross-border activity is essential for this sector, as the UK is a net exporter of professional services, helping offset its deficit in goods. We expect a stable growth rate of 5% over five years, and it is one of the few industries that will surpass its pre-crisis peak by 2023 - a full 18 months or so before the economy as a whole. The industry includes insolvency practitioners, accountants, lawyers and other professionals who will be fully occupied due to the aftereffects of the pandemic.
There is the question of whether some of the exports of professional services will be impacted by Brexit in the medium term. The UK has not been granted 'equivalence', where the EU provides market access to foreign firms if it agrees its rules are equivalent or sufficiently like theirs. This means the EU will treat it as a 'third' country (a country which is not a member of the EU and whose citizens do not have free movement within the EU). Professional qualifications will not be automatically recognised, and so some business may migrate.
Instructions down, costs up
The pandemic has left its mark on most businesses and the professional services sector is no exception. While there have been some positive trends, instructions are down, so turnover has declined, with the likely impact on profitability.
At the same time, fixed costs have stayed fixed. Professional-services firms typically have a large office infrastructure, so you would normally have staff going into the office, whether in London or in a regional location. But due to the pandemic, these offices have been largely unused. However, restructuring of leases can’t be done overnight; it can take some time. This means that it will take years for the fixed-cost base to be regeared and restructured. There have also been significant changes to the way firms work. Many have had to get to grips with remote working, which has posed the challenge of setting up IT systems.
If that were not enough, renewing professional-indemnity (PI) insurance has been a headache for professional services firms too. We’ve seen a hardening in the market and costs have increased. Insurers are requiring much more information than before. In some cases, they have declined to provide cover; we’ve been advising some businesses facing these circumstances. One of the reasons for this is that some PI claims brought last year arose as a result of staff working from home. Insurers are a bit more nervous about providing cover, because in this working-from-home climate there is a greater prospect of claims being brought for negligence.
Most firms have taken Coronavirus Business Interruptions Loans (CBILS) or have deferred taxes. In some cases, businesses have deferred rent too. The problem is that while most firms should be sitting on cash, the repayments for the CBILS will be starting this year. Also, landlords will be able to start enforcing rent payments from 1 April, when restrictions will lift, unless there’s an extension to the current moratorium.
However, despite the impact of the pandemic, the need for professional services firms is not going to disappear. People still need their services. For instance, accountants will still have clients requiring audits, accounts preparation and advice on ongoing trading. Law firms’ services will be required too. There is also still an extremely high demand for conveyancing, but this could evaporate if the government doesn’t extend the stamp-duty decreases at the end of March. So, any firms that rely heavily on income from conveyancing will need to look at whether they’re going to have a significant decline in turnover from April.
It’s important to keep an eye on trends in the market and identify the impact these might have. Firms should also look at the possibility of diversification. For instance, do they offer just one type of service, or do they have others they can develop, to deal with peaks and troughs over the next year?
Priorities for progress
Firms that have invested in IT systems and remote working over the last few years have adapted better to managing the lockdowns. Staff are used to working from home and all the necessary systems are in place. Firms which haven’t invested in such IT systems are finding it harder and there is a substantial cost involved in getting things up to speed now. Have they got the cash resources to do so? Another key consideration is the need to move online and move operations to the cloud, so IT is going to be a high priority – firms who don’t embrace this are going to struggle, and have probably been struggling over the last 12 months.
So, what actions can the sector take, to survive and thrive? As well as focusing on IT, cash-flow management and forecasting are high on the agenda too. We would strongly advise that any firm in this sector should have a plan, encompassing both cash-flow forecasting and general forecasting. The forecasting needs to be detailed and cover at least 12 months so that firms understand their cash cycle and where the peaks and troughs are; and where the negative cash flows are and how they are going to be funded.
How we can help
We work in partnership with all types of firms across the UK and internationally on a range client matters for corporates and private individuals. Our team have long established relationships with leading lawyers in restructuring, commercial, corporate, employment, disputes and litigation, private client and real estate and construction teams to name a few.
We evaluate a firm’s options by providing a review of the current threats facing firms including both regulatory matters and cash flow pressures. In addition, where the Solicitors Regulation Authority are concerned, our team provide regulatory reassurance and client protection planning, reducing the risk of regulatory action, including intervention and the impact of the statutory charge.
Here are some examples of the type of work we do:
- Financial forecasting and cash management regulatory guidance: we can support law firms with regulatory investigations and provide guidance in terms of regulatory outcomes.
- Business structure planning: we obtain regulatory authorisations for new companies to enable firms to seize opportunities, as well as provide protection and contingency planning for rainy days.
- Negotiating with key stakeholders: we handle matters with secured creditors, unsecured creditors, key stakeholders and other partners and staff within a firm.
- Contingency planning: we provide support and guidance for contingency planning to include scenario planning. This is applicable in the event a distressed sale fails to complete.
- Mergers: we work with you to understand your requirements and factors affecting your business in order to introduce potential merger partners as well as oversee merger talks with interested parties.
- Acquisition of a firm: our team can arrange for an appropriate acquisition of your business to take place by way of a merger, solvent or insolvent transaction, either in whole or in parts.
- Introductions: we have a network of firms who are interested in acquiring legal practices and can facilitate introductions that may be of interest.