Since the Jackson reforms there have obviously been many changes in the industry, and I’m sure there will no doubt be more to come in the future! So, aside from the obvious factors which hit the headlines, what are we actually seeing as we undertake our accounts and audit work on PI firms in this new climate?
To start with, virtually all our PI clients have seen a drop in fees in their latest reported accounting period, and a corresponding fall in non-contingent accrued income in their statutory accounts. This was always to be expected given the nature of restrictions under the post-Jackson regime. Indeed, with RTA cases it is now not uncommon for firms to realise costs of less than £1,000 (net of VAT) per case. It isn’t uncommon to hear firms claim they still have as many cases, and that the cases are being settled, but with fee pressure, this activity is no longer being carried through to profitability.
This leads us on to the matter of making cases pay when income is often restricted. Firms are understandably monitoring the cost of bringing work in more closely, and, with the referral fee ban, different marketing methods are regularly on trial. It can be difficult to establish the key indicator of “cost per case” when you need to bring failed cases into the equation to get a truer picture. Those firms that will continue to be successful in the arena will need to have a very close handle on the acquisition cost per case. When margins can be so tight, replacement case agreements or negotiating reductions to your acquisition cost (per case) could ultimately represent the difference between profit and loss.
The majority of pre-Jackson cases should now have been completed, (although more remain than you might expect!). On average, the newer post- Jackson work, aided by the portal, is being turned around much quicker. It is also noticeable that successful firms have a wider “pyramid structure” with a proportionately greater number of lower skilled fee earners which keeps their average staff costs down.
Care must also be taken to monitor staff caseloads in detail to quickly determine “Are the cases actually going anywhere?” and “Are simple cases being settled as quickly as they should?”. Are staff working to capacity or is the caseload simply being distributed among the existing fee earners? Crucially, margins could be evaporating due to underutilised resources.
Finally, we are seeing numerous firms looking to diversify into other areas of litigation work. Some of this case work is anticipated to have a quick turnaround, some are on fee sharing arrangements which are end loaded and other work requires a larger investment from the outset (e.g. in new staff or acquisition and/ or disbursement outlay). It is crucial, therefore for firms to understand these new areas in detail, assessing the likely impact on profitability, and equally importantly the impact on cash flow. Remembering that experts, introducers and staff inevitably want to be paid before the firm can realise its own fees at the end of the caseload process!
“What if” scenarios and prudent planning are therefore crucial in order to manage these mature and developing caseloads, especially when they also need to provide information to third parties.
Neil Wilson is the Associate Director of bennettbrooks. They work with a range of PI firms, from sole traders to multimillion pound turnover companies and with offices nationwide. Their industry experience means we provide specific accounting and compliance guidance on virtually all scenarios. Visit Bennettbrooks.co.uk today to arrange a free initial meeting on any of the issues raised.