Our 2018/19 Survey of Irish Law Firms shows that lock up remains a growing issue with 36% of firms reporting WIP greater than 121 days (27% of Top 20) compared with 24% in our previous report.
Working Capital & Lock-up
Efforts to address lock up continue to fail or perhaps the eye is off this important ball. The pressures reported in our 2017 survey have continued and escalated, including rising staff costs, investment in technology and IT security. Yet lock up - a potential vital source of working capital to help address these pressures - continues to deteriorate.
Legal firms continue efforts to address the lock up problem with half implementing an enhanced credit control function (50%), while 48% have improved training of partners and fee earners and 51% have improved the quality of information available. Importantly, four out of five Top 20 firms have changed their approach by formally linking lock-up performance to individual performance assessment.
Despite these efforts, the results from the survey show that most firms are not reporting any improvement in debtors or work in progress. The majority of firms surveyed this year report working capital at over 60 days, an escalation from last year where most firms had less than 60 days. This is understandable considering the back drop of increased revenue growth however it remains a structural barrier to working capital flexibility and necessary investment for many firms.
The Top 20 firms also report an increase in their WIP days with 27% having an age profile of 121 + days (2017: 11%). This is a significant change year on year and is evidence that firms are finding it increasingly difficult to convert WIP into Debtors. Firms will certainly begin to feel the negative effect of working capital difficulties if they fail to keep a firm hand on the tiller and keep up their efforts in this area.
Increasing competition, challenges in attracting and retaining the best people and pressure to invest in technology all require significant capital investment. As in previous years there are encouraging signs that firms are trying to address this issue through investment in enhanced credit control, improved training for fee earners and, for the Top 20 firms in particular, linking lock-up to performance and remuneration.
Despite these strategies and tactics actual lockup figures are still moving in the wrong direction with more working capital tied up for longer. In practice, firms can find it hard to make significant changes to their lock-up with investments in talent and technology taking several years to translate into increased cash flow. Law firms may need to look at alternative approaches to funding. Cash flow pressure on firms may be reducing at present as top line revenue and economic growth continues but all firms need to have appropriate lock-up management policies in place to protect against any future decline or shock to the economy.
For more information on our professional practice advisory and specific lock up programme contact Paul Wyse, Head of Professional Practices, Dublin office.