Professional Firm’s Year-End Planning Needs to be Different in 2023

30 April is the end of the year for many professional services firms. There are some things that firms need to do every year in these last few months as they approach year-end.  This year is arguably harder than usual.

Partner Corinne Staves shares her top 10 housekeeping tips for Managing Partners below, and 1 extra top tip just for law firms.

1. Bills. Bills. Bills. As always, there should be a big push on billing as year-end approaches. Partners must focus both on billing and on cash collection. Many firms are experiencing a lack-lustre second half of the financial year so significant efforts are needed to secure every penny.
2. Manage expectations. If FY 22/23 has been financially weak, and 23/24 is not expected to be strong, manage partners’ expectations now.  Lots of firms saw a COVID boost which is finally wearing off so some firms are using FY19/20 as the comparator (not last year).  Partners will expect their profits to vary, but often relative compensation is as important as absolute compensation. (Broadly: “I don’t care what I earn as long as it is more than X partner because I consider myself better than them”).
3. Preserve cash for basis period reform. Cash reserves will be a big theme for 2023/24, especially for firms who will be impacted by the basis period reform tax changes (i.e. all those with a year-end other than 31 March or 5 April).  Firms and partners will need a plan to build up cash reserves in advance of the accelerated tax payment dates. Arguably these plans should come into effect from the start of FY23/24 so discussions and decisions need to be made soon. Changes will probably be needed to the LLP deed (such as updated reserving, interest and exit provisions) to avoid confusion or disagreements later.
   [For more, read Corinne’s article].
4. Retirement and succession.   With inflation and costs increasing, long-serving partners may be reluctant to begin planning for retirement and implement succession arrangements.  Firms will find it difficult if long-serving and well-loved partners wish to delay their retirement plans.  However, normal patterns of retirement need to be maintained to ensure that there are opportunities for new partners and to institutionalise client relationships through effective succession planning.
5. New partner promotions.  The war for talent rages. Hiring excellent senior fee-earners is still very difficult and expensive. It is cheaper, and usually better, to nurture and incentivise internal talent to secure the pipeline of future partners.  Ambitious senior fee-earners who want promotion will easily find opportunities elsewhere if their pathway internally is unclear or uncertain. If FY22/23 has been less profitable than the last two years (quite likely given the slowing economy and stellar performance of many firms in FYs 20/21 and 21/22), firms may want to engage early with senior fee-earners about partnership prospects so their focus is promotion, not their (disappointing) FY22/23 bonus. The same principles apply to guarding the equity against new entrants. It is easy to see the temptation of keeping the equity small to preserve profitability for equity partners, but short term benefits may turn into long term detriment if fixed share partners do not see opportunity to progress. A pipeline of good, incentivised future equity partners is vital to secure the prosperous future (and repayments on retirement) of the current cohort of equity partners in due course. Effective succession takes years.
6. Partner demotions and exits.  Managing partner under-contribution, for example by demotion or exit, is a vital part of managing the partnership.  This needs to be an ongoing exercise for all firms. This is understandably hard and some firms do not address this appropriately.  It is widely predicted that firms’ profits will be squeezed in FY23/24 and onwards.  Resentment could quickly build if partners’ profits drop and there is a perception that some partners are not pulling their weight. In extremis this might result in the highest contributing partners leaving. However, it is essential that firms manage any demotion or exit process legally and sensitively to mitigate the risk of claims against the firm.
7. Reduction in partner headcount.  Many are comparing the current economic environment to that in 2008 to 2010. We saw employee redundancies then, and are starting to see them now. At that time some firms also concluded that there needed to be a partner headcount reduction – a quasi redundancy style process. Not because the partners weren’t great partners, but because the partnership was saturated or the work from certain sectors/practices had shrunk. Or both. This is extremely challenging for firms to manage. It is essential to have a good process and partner support. First, the firm needs the right powers, framework and processes. Once agreed, the powers and processes can be applied to identify the partners to whom this will apply. Step one must be completed before step two because once you know you are a turkey, you won’t vote for Christmas. Time is needed to prepare for this process to avoid it becoming a distraction from client work, so proper preparation is needed. Needless to say, it is also vital to handle the process sensitively. Former partners are usually the best ambassadors for the firm, and may be future clients or referrers of conflict work. They wont sing the firm’s praises if they feel they have been badly treated.
8. Strategy. FY 23/24 is expected to be financially bumpy.  But change also brings opportunity for professional services firms. Firms and partners need to articulate and fully understand their strategic goals and how they want to achieve them. They can then be nimble in achieving those goals. Are all partners accountable for delivering the firm’s strategic goals? If not, maybe this needs to be added to the 23/24 appraisal form. If partner headcount reduction is a possibility, it will be vital to identify those partners who are critical to the firm’s future success, not those who are the stars of the past.
9. Mergers/demergers or external investment. Firms may be considering merger/demerger or even external investment to achieve those strategic goals. This may be to grow the business, or in some cases it may be to avoid decline. Either way, firms will have the greatest chance of success if they have prepared in advance and understand their objectives and priorities.
   [For more, read Zulon’s article].
10. Culture. Firms are increasingly finding that their key stakeholders, including their clients and people, expect them the firm to be transparent about key issues and for the firm’s stance to be aligned with their own views. Good examples are ESG and inclusion.  However, it is not enough to have an ESG Charter or work from a carbon neural building, stakeholders expect the firm to demonstrate those values and culture in how they operate. This includes strong leadership from partners. For example, being truly inclusive will include having good policies, but also promoting those policies in practice: if you tell people that they can be a partner while on a part-time working arrangement then you need to show that you have partners who work effectively part-time (and not just getting paid part-time for working non-stop). Equally, the firm needs to protect against damage: if partner conduct undermines the firm’s culture, that behaviour needs to be swiftly and thoroughly investigated and, if misconduct is confirmed, decisive action taken to demonstrate that the firm does not tolerate behaviour which is inconsistent with the firm’s culture. Is active promotion of the firm’s culture on the board’s rolling agenda or 23/24 priorities list? If not, should it be?
11. Law firms: New SRA rules and guidance. New rules are expected from the SRA within the next couple of months (subject to LSB approval).  These will require firms and solicitors to treat people fairly and with respect, and not to bully, harass or discriminate unfairly. There is a positive obligation on firms to require employees to comply, and that all the law firm’s partners challenge behaviour that does not meet this standard.  Firms will need to ensure everyone is trained on these new rules. First to demonstrate to the regulator that the firm is complying and to able to defend itself later if it needs to argue that issues were due to individual action, not systemic failures. Second because partners will be very conscious of this new obligation will make them vulnerable to regulatory sanction if they do not, or inadequately, challenge poor behaviours.  Partners will want guidance from their firms on how this should operate in practice and the systems supporting this new obligation. ‘Unfairness’ for example is subjective and often looks different with hindsight (the only perspective the regulator ever gets).  Is making associates work late unfair?  Junior partners might find it difficult in practice to challenge senior partners, for example.  This could also cause division if a partner challenges/intervenes in another partner’s management of the team when that partner felt their approach was entirely appropriate.  Partners may also be more focused on the whistleblowing protections for them if they have challenges behaviour and/or raised concerns.  Firms will want to review (and possibly update) whistleblowing policies against this backdrop.  Litigators will also be watching the SRA’s guidance on SLAPPs and the conduct of litigation.  It has been an area of close scrutiny by Parliament and the press, and the SRA has indicated it intends to take action where it considers firms or solicitors are not acting appropriately. Firms will therefore need to understand the SRA’s position and train their teams accordingly.
    [For more, read Andrew’s article on SRA rules and SLAPPs and SRA attitudes to workplace culture].