The Sustainable Profits Rule Page 4

Part of the lpc series The New Economic Rules

As virtual provision takes off in estate agency the traditional 1-1.5% fixed charge will become unsupportable. The market will fragment into different types of niche suppliers. Effectively scale fees will only be able to be commanded by those offering expertise in special areas. Those legal practices believing they can base their business plan upon a steady flow of income over the next ten years, selling houses, in the same manner as the market allowed in the last ten years are fooling themselves. Some 30,000 people have already lost their jobs in UK estate agency. Especially unfortunate for those involved, these jobs are permanently lost. Whatever recovery that takes place will be replaced by arrangements which are much more virtual. There will still be a call for traditional estate agency for those who are not internet enabled or perhaps the elderly. It is difficult to see how competition authorities (having particular regard to the cost dis-incentive of moving) will allow existing estate agency internet networks to prohibit individuals selling their own houses on the network provided they pay a reasonable cost.



So when any professional services firm considers the route it is to follow an allowance must be made for the effect of the Sustainable Profits rule. Does the firm deal in work that is immune from this rule? If it does, it is rather fortunate, but paraphrasing the safety briefing provided on passenger planes as to the location of emergency exits - remember the threat can come behind as well as from within line of sight.

Dealing with the new circumstances

Discussion of strategic aims is pretty pointless if the business cannot pay its current bills. So strategy must exist in two separate but contemporaneous strata. The first of these strata is managing through the immediate impact of the economic crunch

1 Immediate Impact
The first reaction of most legal businesses is to reduce payroll costs. Given their size that is understandable but as discussed below the real costs to the business may well be at the top of the business rather than the bottom. If possible, it is sensible to hold onto quality and knowledgeable staff until the strategic aspects of this process have been considered.

There is probably little need for this article to rehearse sensible steps if there is an urgent requirement to reduce expenditure – postponing capital purchases, limiting unnecessary expenditure and reducing waste all feature high on the list. However cutting costs is a sophisticated process at which most legal businesses have little knowledge or indeed experience. Too often cutting costs becomes a pointless and wasteful exercise in arguing with suppliers over the cost of widgets. It is crucial to maximise value rather than simply cut costs. People who are ill equipped for this process suddenly become "cost reduction tsars" probably because they have little else to do. The answer may well lie closer to home.

Squeezing its suppliers could have a negative repercussion for a legal practice. If, say, a technology supplier is heavily reliant on a legal practice customer who postpones paying its bills such action may bankrupt the supplier potentially with dire results for the legal practice. So the golden rule in squeezing suppliers is to be careful with specialist suppliers who are not easy replaced.

Maximising cashflow again needs little explanation; professional businesses can be poor turning time into bills and just as poor turning bills into cash. The practical requirement, felt acutely at this time, to increase cashflow is something that any sensible business should be doing at the best of times never mind the worst of times. There should be no fear in approaching clients and asking them to accept bills earlier and seek payment on speedier terms. If the requests are presented properly, the worst thing they can do is say "no". However these short term fixes need to be crystallised within the second strata which encompasses a great deal more.

2 Structural and Strategic Issues
The second strata are the structural and strategic issues. This is where the issues become more problematic. Elsewhere there is a separate article The Partnership Structure Rule which discusses this aspect at rather greater length. Suffice to say there will be comparatively few legal businesses (if they can be truthful with themselves) that do not have a problem (even a mild one) with their partnership or ownership structure.