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The legal sector was historically regarded as being low-risk and high-value, and was therefore an extremely attractive lending proposition for bankers. However, this has not been the case for five years now – and in a number of cases, firms have been slow to realise the implications.

As lending to law firms is no longer seen as low-risk and high-return, firms need to make sure that they have resources of their own and that they are no longer reliant on significant amounts of borrowed money relative to the firm’s equity.

This means both making sure that there is capital subscribed by the partners, and that the partnership has considered the possibility of external investment – even if the decision is ultimately not to change the ownership structure.

The long-term culture of profit extraction that still characterises the profession means many firms lack a buffer for a rainy day, but they also do not have the resources available to fund expansion. In an intensely competitive market, with new entrants and changing management and funding structures emerging, having those resources on hand for investments that will reduce costs and improve the client experience will be an important characteristic of the firms that will survive and maintain their independence (or attract investment).

Focus on Cash Flow

Firms must develop an absolutely relentless focus on cash flow and cash generation, to create sufficient balance sheet strength to fund growth. This is not a good time to be relying largely on debt to fund the future.

The first action should be to ensure that all partners are aware of the cash flow imperative, and to make sure that partner and fee earner standards include measures that will improve cash flow.

Those standards should not be limited to chargeable hours, but should also include aged WIP and debtors, and rewards should be linked to the level of lockup by fee-earner, department and, ultimately, across the firm.

Strengthening the Balance Sheet

Cash flow can be greatly improved in a short period of time through such a dedicated lockup reduction programme, and this will strengthen the balance sheet – an important factor in any potential investment decision.

It should also be recognised that different work types have different cash flow profiles – Personal Injury and Clinical Negligence will take much longer from instruction to cash than Conveyancing or Company Commercial work.

Billing processes and standards should reflect cash flow profiles, so that upfront billing and interim billing are used where appropriate, but ultimately the firm must be absolutely sure that it can fund its work, through a healthy mix of debt and equity. 

In our previous article, The Three Forces and Profitable Partnerships, we outlined the threats that confront law firm managers, and suggested that a new approach to client acquisition and retention is required.

However, this is not an easy shift to make – if it were, all law firms and lawyers would be taking this approach already. One of the key obstacles to success is that the value to the client often remains hidden, and therefore actually closing sales is extremely difficult. On the first day of the Profitable Partnerships Programme, we focus on uncovering and demonstrating value, and overcoming objections from potential clients.

Focus on Value

Many lawyers struggle when talking about value, as for them the value in a case lies in the technical interpretation of the law. However, this is a statement about content – and for most clients, the value lies in the context of the work. Rather than describing technical competency, which should be a necessary condition for hiring a solicitor, lawyers should focus on the tangible benefits they can bring, such as the extra cash winning a case may generate, or the peace of mind of a swift and amicable resolution.

The key thing is to understand what the client values, and to frame the conversation in terms of the specific value for that individual or company. When the client perceives that their needs are prioritised, they are much more likely to engage the services of a professional.

Value in a Niche

It is far simpler to demonstrate the value of your services to potential clients when you operate in a niche. Developing a reputation as a niche specialist reverses the normal selling process, and encourages clients to seek out the services of a specific individual or team – rather than the individual constantly searching for new sources of work. The client will already have some knowledge of the individual’s technical abilities, and the focus on the value to them will be all the more welcome.

Operating in a niche means that alliances can be developed, contact can be more easily and systematically maintained, and introductions and referrals can be cultivated. Right from the outset we deal with these very issues, looking at practical ways to carve out a reputation and develop a sustainable flow of new work, maintained in a systematic way.

To find out more about the Profitable Partnerships Programme, click here or email info@wilkinsonread.co.uk.

In an economy that promises to be ‘choppy’ for some time to come, and in a legal sector where ‘choppy’ would be an optimistic description of the outlook, managers could do worse than to focus on law firm profitability.

Strategy and Law Firm Profitability

It is true that a hallmark of the profession over the years has been the emphasis on profit per equity partner, almost to the exclusion of any other measure. League tables have driven this approach, and figures have often been ‘massaged’ in light of their powerful role as a marketing and recruitment tool. This has indeed diverted attention from measures that could be of greater use to management teams, such as the firm’s cash position.

However, profitability is still an extremely important measure for law firm managers, and when used in the right way should underpin the firm’s competitive strategy.

Law Economics versus Law Politics

In even the most successful partnerships, politics has traditionally been the determining factor in strategic decisions and their implementation. Firms can no longer afford to allow law politics to defeat law economics. To be successful, the partnership must be united and divisive figures should be dealt with. This may be the best opportunity the firm will get to restructure and create a harmonious partnership (if one did not exist in the first place…).

Legal Cost Structures

Achieving optimum law firm profitability requires optimal legal cost structures – and this is no simple matter. Law firms have always been described as ‘fixed cost operations’, and to an extent this limits the scope for change. However, certain costs can be made more variable, using arrangements such as part-time working, paralegals and contract solicitors, and outsourcing (IT is the prime example, but more and more services are becoming susceptible to outsourced delivery, and make or buy decisions are an important consideration for managers).

Ultimately, any law firm’s cost structure will be defined by its people, and therefore any major restructuring must focus on people. This may be painful, but it should also be fair – and fair does not mean equal. Some departments, teams or support functions may need to be cut back, whereas others may require investment. Focusing on profitability means identifying and realising potential, whether this requires investment, divestment or scaling back.

Successful Partnerships

Although managers and partners may feel that the worst is now over, the partnerships that will succeed in a challenging environment will be those with a relentless drive towards efficiency. Whatever the approach, law firm strategy should be driven by a clear focus on profitability.
 

We discussed this issue back in September and, looking at the discussion going on over on LinkedIn, it seems as though the debate isn’t going to abate.

The American author Ron Baker has written at least five books on the subject of pricing – although you don’t need to read every word of every book. He demonstrates that you can make real money out of fixed prices if you take the trouble to know the client, and to set up the pricing conversation properly. This is a question of demonstrating value to individual clients.

We personally know an accountant who runs a small (4 fee earner) firm doing largely one-off project work who claims that by using these pricing techniques he has earned over £1million in additional fees over the past 5 years – compared to his standard hourly charges. I have no reason to disbelieve him.

Can it be done in legal work? In many cases, the answer is yes. But it is not as simple as thinking up a number and sticking to it. And sadly, many lawyers (encouraged by their performance measurement systems) are unwilling to put in the upfront effort, either in learning the techniques or getting to know the clients.

In work where the price is externally determined, the focus has to be on identifying and improving cost of production. This will be the focus of an article we have appearing in the Gazette’s In Business section in the spring. Any thoughts would be much appreciated.

We have had quite a bit of demand recently for more information on our bespoke services. This post is a case study illustrating how we would tailor our consultancy services to our clients’ specific requirements. And how the “obvious” answer is not always the right answer!

The client is a high street firm, with the old three-legged stool mix of Conveyancing, Legal Aid and General Private Client work. We were asked to help following a difficult period of more than two years. One of the founders had retired and not been adequately replaced. The Legal Aid departments in particular, had become very busy but had not been managed.

Matter starts were plentiful – but not all matters were being progressed satisfactorily to completion – and the Legal Services Commission had inadvertently overpaid the firm and wanted its money back – which was not available.

At the time we became involved, the firm was not profitable, not generating cash, was losing good people and, in some areas, was losing its reputation.

We did our initial analysis, but in this case extended it and interviewed around far more people than usual – not just partners and fee earners. We had to find out WHY things were so awry. We identified over 50 action points, grouped under key headings, including:

Financial management
Management of the partnership
People issues
IT
Negotiations with creditors

Our ratio analysis showed that the most important underlying issue was people performance – too many people producing not enough output.

The obvious remedy was to cut back and institute immediate staff cost savings. However, we had identified that previous cutbacks had caused much of the problem. Low profitability had led to low salary reviews and non-replacement of good people who understandably left.

So we did the exact opposite of the obvious. We put in place a very, very focused programme of file completion, billing and collection. This not only generated the cash to satisfy the lenders but also meant that the remaining good staff could be paid more. Those staff not up to scratch were replaced with better, albeit in some cases more expensive, staff.

What we did was to turn a vicious cycle of decline into a virtuous cycle of recovery.

We persuaded the individual partners to take responsibility for specific aspects of the recovery programme. One of the partners, despite a lack of accountancy training, successfully took responsibility (with our help) for hands-on management of the finances.

Within a relatively short period of time, all the creditors had been paid in full and the firm’s overdraft is well within manageable levels. Its reputation has been recovered, and in some areas the firm is continuing to grow and take on significant new clients.

If you would like to see more case study examples, please click here.