Counting the cash: Running a PI practice in treacherous times

For personal injury firms, there is one big issue that can make or break a practice: cashflow.

That is because in the harsh world of PI, lawyers only get paid when they win – and not until the end of the case. In the meantime, not only do they bear the cost of litigating the claim, but they also need to stump up for medical reports and court fees, because PI clients cannot generally pay for these themselves.

In low value claims, these disbursement costs will be fairly modest; but the figures must be multiplied across a large number of claims. At the high value end of the spectrum, there will be fewer cases, but disbursements in each can be huge – with potentially multiple expert reports, and a £10,000 court fee.

All this cost has to be carried by the law firm until a case concludes. As Philip Quigley, partner at Smith and Williamson, puts it: “A lot of cash is absorbed into the case, before you get a lot of cash back. You need deep pockets – it’s the nature of the work.”

Even relatively small PI practices need vast amounts of liquid capital. Firms typically need to be able to fund a year to two years of work; so a firm of £5m turnover, for example, would need access to £5m to £10m.

Firms that are growing will eat even more cash, because the amount of funding needed for new cases will outstrip any payments coming in as existing cases settle.

In fact, as Barry Wilkinson, founder of Wilkinson Reed, points out, cashflow can be very deceptive: “A declining business actually creates cash. It’s a growing business that consumes cash. So good cash flow does not necessarily mean you are not heading for a cliff edge.”

He adds: “The road traffic accident changes mean that the older a case is, the more likely it would be to be under a regime that pays more for the work. The value that firms are billing and collecting at the moment is different to the value they are generating now, because the billing relates to cases that were brought under a regime that was a bit more benign.

“So they are getting in cash that is actually better than the work they are doing today. This means their cash flow can deceive them. Is it new or old money they are billing? The danger is that the cash flow will then suddenly fall away.”

Piling on the pressure

As if feeding a cash-hungry PI firm were not enough of a challenge at the best of times, a number of factors are making this even harder at the moment. Court fees have surged, cases are taking longer to resolve, and failures in the PI market have made lenders wary. 

David Marshall, managing partner of Anthony Gold, notes: “The delays for a costs and case management hearing in the High Court are getting longer and longer, and that just starts the process. The worst I’ve had was a year between the filing of the defence, and the costs and case management conference (CCMC). Having to wait six to nine months is now commonplace.”

Marshall adds that defendants also seem to be delaying settlement – which is partly because they are waiting on favourable changes to the discount rate later this year.

Following a review, the lord chancellor is expected to set the new rate – likely to reduce compensation payouts – by 7 August. At that point, claimant firms should see a short-lived cash bonanza, as the settlements finally come rolling in. From famine to feast. 

Viv Williams, consulting director at Symphony Legal, has also noticed a general trend towards settlement delay. He says: “In clinical negligence, there’s a push back by insurers. Whereas they used to settle claims in four to five years, now it takes six to seven years to settle.”

He adds: “I do a lot of training with the banks. The credit teams are saying, we don’t believe we can extend facilities to those firms where insurers are delaying payment.”

Where claimant firms are under severe financial strain, there is an obvious risk that they may be tempted to settle a client’s case for less than it is worth, just to get the money in sooner.

Is it likely that some firms are indeed undersettling claims? Marshall observes that he has encountered cases where a firm has not invested in pushing the claim forward as they should have done.

It may have been because it lacked competence in the area, or because it did not have the money to spend on the claim. “I have no evidence that undersettlement is occurring,” he says, “but the economic pressures are there”. 

Finding funding

So where exactly are PI firms supposed to find all this cash that they so badly need? A traditional law firm is financed through a combination of partnership capital and bank debt, with the bank typically putting in three pounds for every one pound the partners put in.

But in a PI firm, for every partner pound, the bank would need to be lending ten. No bank would lend based on that level of gearing, even in a more favourable climate – which this certainly is not. And as mentioned above, bank funding is now getting harder to come by.

Williams says: “The main banks like NatWest and RBS have been very dominant in the PI space, but they are now getting their fingers burnt with all these failures. Banks are very nervous about the state of the market.”

Aside from the banks, there are specialist lenders who service the PI sector, but they don’t necessarily come cheap. Rates will often be above 10 per cent.

Quigley explains: “The money is quite expensive; the highest we’ve seen is 1.5 per cent per month, so 20 per cent. When people charge interest rates at that sort of level, it’s designed to get the borrower to collect [on the sums they are themselves owed]. It’s known as ‘nudgeonomics’.”

For Williams, the answer lies with private equity investment – but this requires a market transformation. “If the funders aren’t out there, how do PI firms fund their business? There will be a massive consolidation,” he predicts.

“I think there are 3,000 law firms that won’t be around in the next five years, either through merger, acquisition or failure. There will be 600 to 700 specialist firms doing most of the PI work in the UK. We’ll see more private equity backed funding.”

Williams recently became non-executive chairman of private equity backed AWH Solicitors, which is in the process of acquiring new PI practices. But inviting private equity investors into a firm is not by any means any easy solution.

Marshall points out: “Private equity is another way to raise money. But you are giving away control. And you must be a tightly managed firm with good reporting, and good systems. Private equity investors aren’t interested in partnerships where there are 17 different partners doing things in their own way.”

Another option is third-party litigation funding, with funders potentially willing to invest either in single cases, group actions, or a portfolio of PI claims.

Marshall suggests this could be more of a ‘halfway house’ for firms that do not want to give up control of their business. One further way to get hold of capital, for ambitious firms with a good track record that are seeking to grow in scale, is a public listing. But with relatively few firms having listed so far, as Quigley points out, “it’s a bit early to say whether this is a successful model.”

Smaller steps

Because cashflow is so vital to a PI practice, lawyers in this sector are streets ahead of col- leagues in other practice areas when it comes to financial management.

But that doesn’t mean there is no room for improvement; and there are plenty of things that PI firms could be doing to help themselves.

When it comes to court fees, for example, most firms tend to pay the fee up front, and then apply for remission on behalf of their client aftwerwards.

But it is much better to apply to pay a lower fee in the first place – and courts actually prefer it that way. The threshold for qualifying for a reduced fee is not as high as one might assume; an individual with a partner and two children, for example, will be eligible for some reduction if they earn less than £1,735.

This puts many PI clients within scope. Firms should examine their working practices to identify any factors that may be delaying sending files to their costs lawyers and swiftly getting bills sent out to the opposing party.

When it comes to the success fee payable by the client, this should be billed for as soon as damages are received – rather than waiting for costs to be sorted out first.

Firms should also make sure they apply to court for an award of interim damages, and interim costs, wherever they can – to get the cash coming in as early as possible.

The costs budgeting regime introduced as part of the 2013 Jackson reforms means that firms should now be able to obtain significant costs on account.

But beyond these relatively straightforward steps, there is scope for even more effective change when it comes to firms’ software sys- tems, and how they use them.

Quigley says: “You have to have a pretty good system to monitor your exposure and WIP [work in progress], and good credit control. When the judgment comes in, you need to collect the cash as quickly as you can. “So make cash collection a key performance indicator for staff, on the basis that what gets measured, gets done.”

Wilkinson adds: “Firms do not have a good enough understanding of the management information on their systems, considering the amount of money at stake. Too few firms actually use the management information to drive and track their future settlements.

“If you are a large firm with several thousand cases, there should be a statistical predictability to your caseload. If you know the value of the claim and which track it’s on, you should be able to predict reasonably well when it will turn into cash.”

Wilkinson suggests firms should be able to establish where their different cases should be at different points – much like a train timetable. If a fee-earner’s case does not get to the right place at the right time, then their manager should be asking them what has happened.

And if firms do not yet have all the information they need to draw up that timetable, there is business intelligence software available to assist.

“Not enough firms operate this in as disciplined a way as you would expect, considering the sums,” says Wilkinson. “And you don’t have to be a large firm for the amount of money at stake to run into the millions.”

The consultant also has concerns over the approach firms are taking when venturing into new areas of work – be it clinical negligence, holiday sickness, cavity wall claims or other areas – and the effect this could have on their financial position. He says: “There is a really important issue, that I’m pessimistic about.

“As firms are finding it hard to make money out of quicker cases such as road traffic accident or other portal claims, they are increas- ingly taking on other areas of work that they are not familiar with, which are high risk and longer term."

For example, a lot of firms have taken on clinical negligence work, where the chances of success are lower and the time frames are longer. These two things put together mean it can be a very long time before you know whether your case is worth anything.

A lot of time and money can be wasted on something that ultimately provides nothing. But the issue is more about people taking a decision to get into a line of work with completely a different profile, which they’re not accustomed to managing. 

“I have seen cases where, for instance, a relatively small firm has run up a couple of million pounds of WIP over a few years, and still can’t predict the chances of success with any accuracy. Firms are taking on work that they don’t understand the cash or risk profile of.”

In the current hostile environment, firms need to focus their energies on making sure they take every step they can to shorten the journey between opening a file, and ultimately receiving payment.

It couldn’t be more important. As Wilkinson puts it: “For personal injury law firms, cash flow is a matter of life and death.”

Rachel Rothwell is a freelance journalist