Banking on solid foundations

Any partner with capital locked into their law firm should want to know what is happening with their investment and influence what is done with it in future. Any investor in the new world of alternative business structures would be the same. So why should you treat your longest-standing investor – your bank – any differently?

It goes without saying that the banking world has changed, as has its relationship with lawyers. Law firms are rightly no longer viewed by banks as copper-bottomed. This has led to widespread criticism of the banks for becoming more risk adverse, but the days when lawyers could expect lending without restriction or potential consequence are, unsurprisingly, gone.

As a result, law firms need to change their attitude towards banks. This is a two-way street, of course, and as with pretty much everything in life, it is down to building a trusted relationship.

This means that before engaging with a bank, firms need to undertake extensive internal groundwork to engender confidence. Banks will expect evidence of comprehensive business planning, with clear business objectives.

Firms should, of course, be doing this anyway, and robust management information and security of understanding the firm’s situation enables SGI to move quickly when opportunities arise, such as buying the personal injury caseload of Challinors when it went into administration.

SGI Legal approaches this from both the top down and bottom up. From the top down, SGI is focused on producing robust medium to long-term forecasts based on agreed business and financial objectives internally. These objectives are owned by the board and everyone within the business is made aware of what these are and how they apply to them.

Equally, the objectives are reviewed and performance is challenged on a regular basis. Weekly internal key performance indicator reports are published and senior staff have access to a bespoke live dashboard. As a result, objectives can be reviewed formally on a monthly basis.

The bottom-up approach means the base for the objectives is underpinned by data captured from the case/practice management system. This data is not simply focused on fees billed, cashflow and profits delivered as a firm, department or individual; SGI captures data around such things as lead-to-case conversion rates by source or work type, the timescales to specific milestones on a file, and what stage a litigious file is currently at. These provide indicators, with a good level of certainty, on such areas as current team capacity, future resource requirements and short/medium-term revenue.

The next element is what you are going to ask for from your funder. SGI always tries to be as a conservative as possible. It focuses on ensuring projections are realistic, based on reasonable assumptions from the information available. It then factors in some headroom for margin of error combined with realistic/ prudent assumptions – a minimum of 10%. While objectives should always be challenging, it is important that firms are absolutely confident of remaining within their funding requirements.

The next step is actually talking the bank through it all. How this is done is critical. It is very much about balance – you do not necessarily need to go into detail (you need to be right on top of that detail to answer any questions) but you must be clear on what support you need, and more importantly, why. There have been too many instances of senior partners/board members in front of bankers with projections that they do not properly understand themselves.

When SGI and NatWest discuss funding, we are clear in terms of agreeing timescales and what is required on both sides. SGI has ongoing projects which may potentially require specific individual funding in the future and so are included in the firm’s planning process to ensure NatWest is comfortable making funding decisions within agreed timescales. In the event that things change and more funding is required, we are clear that separate discussions are needed.

To date this has worked, and when lending is not forthcoming, SGI understands why and what action is needed. If the decision is positive, then it is critical not simply to switch off or disengage with the bank. If anything, it is quite the opposite – regular updates and concise and focused information ensures the bank is kept in the loop. Critically, any information SGI supplies, other than very basic data, is always qualified to identify key variances, both positive and negative.

Fundamentally, it is important to recognise that lawyers are accountable for their performance to the bank. As such, it is reasonable for the bank to expect to understand what you are doing with its investment and why. SGI has set out to treat NatWest as an additional board member, working closely with its relationship manager, Andrea Kelly, in Liverpool.

Both of us share the risk of losing our investment if poor business decisions are made or too an aggressive a strategy pursued. It is much better to share the success of getting it right.

Steven Evans is financial director of SGI Legal and Steve Arundale is head of professionals at NatWest