Professional service providers can afford to be no less complacent than others in the current period of financial turmoil. Just what will the financial turmoil mean for UK professionals and what can they do to help themselves.
The financial crisis will make competitors innovate. There are firms out there who are expert at commoditisation, re-engineering their practices so that advice is given through the framework of a repeatable process without the need for professional advisers at high hourly rates offering bespoke services. This drives down their costs and, if they manage to achieve sufficient volumes, can make them very profitable.
Such competition is putting pressure on fees and margins in many firms, with, for example, anecdotal evidence that mid sized firms in large commercial centres are facing this threat as well as those regarded as good practices outside these hubs.
If the competition doesn’t get you, then perhaps the general economic malaise will. For example, estate agents are facing lower and lower levels of activity, and the knock on effect in conveyancing is expected to be just as drastic.
In the traditionally ‘sexy’ area of transaction work, deal volumes are down, with most corporate financiers expecting the remainder of 2009 being very challenging indeed, unless you have clients with petrodollars in their pockets. Maybe now is just the time to head for that holiday in Dubai that you have always promised yourself.
Faced with threats such as those noted above, working capital management is going to be key. More than ever before in the recent past it is going to be important to get work done expeditiously, send the fee notes to the clients and then collect in the debts due.
Beyond this, whether you are a partner, an LLP member or a director of a corporate entity, you should be looking very closely at what your management reporting systems are telling you. Traditionally, summary financial information has been focused on fees less salaries paid to employees with a further deduction for other overheads. But this can lead to a false picture.
Some firms are choosing to put in notional figures for certain items, just so they can look at their firms on a more commercial footing and reach a judgement on the underlying profits or, in an increasing number of cases, losses that they face. Firms with an eye on this now include notional figures for salaries to equity partners, rent for office space and interest, including interest on partners’ capital.
Why do this? If the property is owned by the partners, then why include notional rent. If there is no provision for interest on capital, why include such a figure. Even if such adjustments are considered, isn’t it all academic as equity partners or their equivalents in LLPs or limited companies will get the appropriation of profits due to them. This might be regarded as fair comment, but relying on the same shape of firm for the future, whether it is planning for good times or bad, shows a degree of complacency.
When the management information charts are showing growth and prosperity there may be no temptation for change, but when the financial data then goes in the opposite direction, their true worth is often challenged. A phrase that will be often heard in partners meetings if the financial turmoil continues, “If only we could have pre-empted this”.
Reviewing figures that have an in-built cushion to them i.e. no notional salaries for the owner managers, no notional rent and no notional return on capital, is fine so long as the cushion remains plumped up. It does not measure a firm’s commercial cost base and once the cushion is gone, where does a firm’s management turn to weather a financial storm. Usually it is inevitably to staff rationalisation – the euphemism for laying off those people it can with minimal cost or, worse still, making redundant people who have been loyal to the firm for many years.