Working treasures: How to unlock hidden work-in-progress value

27 Sept 2011Feature

An audit can unlock hidden work-in-progress value in personal injury cases, suggest Zoe Holland and Lesley Graves

Many law firms have come under pressure from declining conveyancing, commercial property and corporate work. Consequently, personal injury work has become a focus for sustainable income. If, however, personal injury work is showing signs of being less lucrative than in previous years, it may be time to undertake a closer review of the firm’s personal injury cases. This could unlock hidden work-in-progress (WIP) value, which will in turn help to improve cashflow and protect the firm from dormant professional negligence claims.

High volume caseloads and pyramid management/supervision structures can sometimes mean that cases aren’t consistently managed accurately. Trends of where fee earners and supervisors may be getting it wrong may be missed. Case management systems and supervisory checks may not provide the full picture.

Carrying out an audit on a sample of your firm’s personal injury cases can provide an insight as to whether fee earners are consistently assessing prospects of success, quantum value and WIP value with sufficient accuracy.

All personal injury cases should be audited on a regular basis. The value may be immeasurable: it will either confirm that all fee earners and supervisors are consistently getting it right, or it will show where there is room for improvement.

Auditing generally reveals room for improvement. This should not necessarily be seen as a criticism of the firm’s personal injury team. It is a simple management fact that reviewing systems and processes on a regular basis can lead to improvement.

This is critical for firms that are:

experiencing drops in performance by their PI team;
concerned regarding the effects of the Jackson review;
gearing future PI work toward commoditisation/niche services;
feeling the pain of restrictive cashflow; and
restructuring.

If personal injury work is not assessed, managed and understood at the appropriate level, it may have a detrimental effect on the firm’s:

cashflow;
profitability;
debt;
professional negligence record;
premium for professional indemnity insurance; and
overall capitalisation.

Why conduct an audit?

An audit helps a firm to adapt and innovate so that its personal injury practice remains profitable. It can:

provide an overview of the value and risk profile of the cases audited, with reference to the projections set for individual cases and team targets set by fee earners and heads of practice;
illuminate how far apart the panel overview is to individual fee earners;
reveal whether fee earners’ current projections are realistic, based upon current assessments of individual cases;
identify the training needs of fee earners and set case plans to maximise value and reduce risk on individual cases, based upon the audit panel’s experience;
demonstrate whether the firm has the skills, experience and specialist expertise to manage the cases profitably; and
reveal whether the firm is well enough resourced to accurately assess its cashflow, value of work in progress and risk profile.

Structuring an audit

Scope

The following areas should be assessed when conducting an audit of the firm’s personal injury practice.

The firm’s personal injury caseload and fee earners, including an overall assessment of the value and risk profile of the caseload.
Whether fee earners have the requisite skills to manage their caseloads and litigate effectively and profitably.
Training needs.
The suitability of external service providers.
The ability of fee earners to effectively use The Rehabilitation Code.
The ability of fee earners to accurately assess when there is a need to refer clients for welfare benefits advice and to financial experts.
Cashflow predictions in relation to the caseload and the suitability of the assumptions made.
The management information reports relevant to the financial assessment of the caseload.
The accuracy of the firm’s time recording on individual cases, current WIP and future profit cost predictions.
Any other matters that are considered to be materially relevant to assessing the overall value and cash generation of the caseload.
The suitability of the current resources within the firm to achieve the outcomes as proposed within any cashflow forecasting.

Panel approach

A panel approach can ensure objectivity in reviewing a caseload and fee earners’ abilities to ascertain true value and risk in personal injury cases.

The panel must have the experience to match the caseload to ensure sufficient breadth of experience and knowledge. Industry accreditation and specialism in personal injury work is vital.

The panel must have the ability to determine the true value and risk profile of a personal injury caseload. If the panel has head of practice experience, it will also have the ability to assess the appropriate resources required to manage cases profitably.

During the audit, the panel should assess individual cases and fee earners with regards to:

complexity of cases;
progress of the litigation;
ability to correctly assess risk, liability and contributory negligence;
assessment of risk and value in relation to quantum;
expert selection;
prospects of success; and
estimated value of WIP, projected costs to settlement, effective cost planning and budgeting.

The audit can provide an independent overview of current issues including resources, skills and expertise, areas of risk, current WIP and cash generation.

Audit stages

Information gathering

There are certain markers, both in individual cases and the overall management of caseloads, which indicate inexperience and inaccuracy. This can put a firm in a compromising position, leading to significant margins of error in its risk profile, value of WIP and cashflow predictions.

In addition, there are also markers that indicate whether a firm has the correct strategy, resources and skills to enable a confident valuation of WIP, cashflow and risk.

It is with these markers in mind, before an audit, that the firm needs to ask fee earners to provide their views on their cases regarding their approach to each case in terms of risk, prospects, evidence, liability, quantum, costs and so on.

Case selection

The audit panel must have the ability to select appropriate cases and fee earners against criteria specific to their caseload and team. This will include:

complexity of case – RTA portal, fast track, multi track and serious injury;
progress of the litigation;
valuation of liability and quantum;
expert and counsel selection;
estimated date to settlement; and
estimated value and recoverability of current and future WIP.

Common failings

The audit process provides an immediate insight into the team, caseload, litigation practices and management practices involved.

Common areas where fee earners regularly fall down, evidence an inability to litigate a case properly and fail to achieve its full potential on liability, contributory negligence risk, quantum (the value of the claim) and costs are as follows:

retainers/funding arrangements;
inaccurate assessment of evidence, liability, breach and causation and quantum;
quality of advice and service from counsel, experts and agencies;
an inability to spot poor advice – both medical and non-medical – in expert reports;
inaccurate time recording;
inaccurate assessment of risk; and
potential negligence issues.