In a competitive, post-Legal Services Act market, where the perspectives of the investor community are becoming ever more important, the imperative for firms is to agree a purpose, and move the focus to financial measures beyond simple Profit per Equity Partner.
Defining a Common Purpose
The first step is to hold a partners’ meeting and determine what holds the partnership together. Following the introduction of the Legal Services Act, firms are already securing capital for expansion, and those firms that invest in their business will ultimately be the winners. Many firms are very much the product of history and so determining what holds the partnership together and defining a common purpose and a set of objectives is crucial.
Although in such a competitive environment profits, cash management and growth must be the starting points, this is about more than money - mid-sized firms are complex entities, and considerations such as lifestyle, reputation and the intellectual challenge are all important.
Financial Objectives and Disciplines
It must be recognised that partners have different objectives, but also that meeting those objectives in any area requires standards and disciplines. Rewards should be linked to objectives. The business must be focused on cash management to secure strong cash flow, and partners must accept that they can no longer keep drawing money out of the business. For firms practising all areas of law, finance is crucial and income generation must come before income extraction.
In the medium term the financial focus should be on capital growth, and this requires a roadmap - including a plan of how the firm is going to recruit and retain more clients and better clients, and how it will gain more referrals and repeat work from those clients.
Law, Finance and Investment
Law firms must invest in order to grow the client base, and this involves spending money on cost-reducing technology, improving the client experience and changing the service package to be more in tune with what the client wants.
The issue of investment requires serious consideration, and each individual investment should be subject to a detailed business case.
The firm should have a business development plan articulating who the firm's clients and prospects are, how the firm intends to reach those clients, what the goals are in terms of client acquisition and revenue generation, and what investment is required to achieve those goals.
The standards by which law firms are judged are changing as a result of the Legal Services Act and a tough economic environment, and the new criteria are set by investors. Therefore, whatever the firm’s defined purpose may be, the focus must in the first instance be on cash generation and capital growth.