Stress testing is a method of testing the stability of your system. It involves testing it beyond its normal operational capacity – often to breaking point – in order to observe the results and make changes where necessary. Industrial users often refer to the process as a ‘torture test’, which reflects the stress that you (or the professionals in charge of the test) are testing your system against.
Stress tests are the ultimate risk management tool. They evaluate the – however unlikely – events or movements within a set of financial variables in order to assess how the system handles the tasks and the risks posed by them.
The SRA states that the financial stability of law firms should be their very top priority – of course, this is ‘a rule’ that must be adhered to in any event – the SRA saying it needs to be a priority merely reinforces this mandatory instruction. This is one of the reasons stress testing is a great tool, as it can ensure the financial stability of any action you undertake – and you can test its success before you undertake it.
Contrary to popular belief stress testing is important for positive as well as negative events – it isn’t all doom and gloom about the negative sides of the actions undertaken because it can also determine just how successful a positive action can be as well.
Law firms with a view to grow should consider whether they have the productive capacity and the internal systems – both technical and administrative – as well as the managerial prowess, to cope with a new potentially large influx of clients, because without this the new clients you get will go elsewhere due to falling levels of service.
On the other hand, where firms would – or at least should – have projections for the future of their practice, they need to know what happens if the expected turnover is not met. The first thought – as is human nature – is ‘we might not make the profit we anticipated’, but, in reality, the real question should be ‘what effect does that have on the cash in the business, and how does it affect the business?’
What areas should be stress-tested?
Turnover
What would be the consequences of a turnover drop of 10% or 20%? And, on the flip side, what would be the consequences of a dramatic increase of turnover by 10% or 20%? Knowing in detail what the financial consequences of these eventualities can be enables you to make the right choice for your business.
Cash
What if our cash management becomes less efficient? How quickly will cracks begin to show in regard to cash availability, facilities, and the meeting of SRA regulations around the flow of cash in your organisation? A cash flow forecast is of the utmost importance to the future of your organisation, as it allows you to forecast the effect of a lack of cash flow – meaning you can make decisions around spending that reflect the sustainability projections of your firm.
Staff costs
You must learn when you need to take action. When do redundancies need to be made? When do you need to recruit in order to benefit the organisation?
Your place of work
You need to know whether the place you work from is sufficient to support your forecast for the future of the organisation. Is it flexible enough? Can it adapt to the ever-changing landscape that you operate in? This needs to be looked at in both a space capacity and a financial capacity.
Tech
As you know already, technology is the lynchpin of modern work in every sector, and that is no different for law firms – tech is a key part of any professional law practice, whether it is in the form of a CRM or the computers you work on. You must know if the upgrades your tech needs can be accommodated within current cashflow projections.
So now we know what the stress tests must be centred around, let’s look at how law firms undertake stress testing and how often it should be done.
Stress tests – how and when?
It is common for firms to have a kind of half measure approach to stress testing; they have the right intentions but, once the stress test is completed, they take no further action following the exercise. It is recommended to have an outside voice to enforce the needs pointed out by the stress test. It could be that one department is holding back the entire organisation – you could have individuals with little to do for the majority of the time in one area and other departments at breaking point. External specialists have a perspective that is completely impartial and are not distracted by other entities – they will focus on ensuring that you and your team implement what is needed.
It is common for most businesses to have one or two-year projections – good practice, right? But the problem is that most don’t revisit those projections in the period between them and are treated to a nasty surprise as a result. The opinion of an independent specialist can be beneficial in ensuring that adequate reviews of progress against projections are carried out. They will then ensure that the plans are communicated through the relevant channels in the organisation so there is a collective approach to ensure that the change is achieved successfully. Often the change won’t be technical but an adaptation in attitude and behaviour – this can only be achieved if the key staff members share in the strategic vision of the owner, and the specialists.
In conclusion, stress testing helps you to be sure that your organisation is prepared for the next step in your business plan. You can prepare your tech, teams from all departments, and the cash flow needed to achieve all of this in advance – meaning that nothing can sneak up on you and jeopardise the success of your firm – all whilst adhering to SRA regulations.
Would you like to assess the threats to your law firm?
If you are actively considering how to tackle the threats to your firm, need to get prepared for an SRA ‘Stress Test’, wish to implement Cyber Essentials, or are simply seeking a more strategically aligned partner for IT, we can help. We, at Exi-Go, are the experienced IT company you need to help prepare your defences against any possible cyber threat, who also have knowledge of your legal systems and understand your working practices.
Please make contact with our team today to organise a free, no commitment discovery call to learn about your possible threats and our proactive approach to help you combat them.
Contact us for more information on 0203 096 2220 or hello@Exi-Go.com
