Category: Uncategorized

Having identified your ideal client type, the next step is to decide on the best methods of communication with those clients and prospects – and to understand the cost implications of the strategy.

First Things First – The Law Firm Database

As we have iterated many times before, the starting point should always be the data the firm already holds in its database. The database should contain all of the details relevant to profiling the client – including status (lead – qualified or unqualified – or current or past client), their current need, any potential future needs, and preferred method of communication. All contact should have been opted-in for.

If this data is not accurate and up to date, this provides an important task for someone in the support team. It may well be that fee earners will also need to gather the missing information in subsequent client meetings, and some aspects of the database (such as the will bank) may need extensive cleansing to ensure the integrity of the data.

Return on Communication

Without doubt, the cheapest way to communicate with clients is via email. However, in some practice areas this is not always practical. Business clients are likely to appreciate email, and keep in touch campaigns such as newsletters should also be electronic. Others, such as elderly private clients, may prefer telephone or even personal meetings. Each communication has a cost attached – even with electronic communications, in terms of fee earner time. Law firms are very good at measuring time billed – but not always so good with the hidden costs often involved in legal Business Development.

Keeping in touch with clients, and especially with prospects, can also be effectively done using new social media methods. Again, this requires careful consideration. Business clients may well like to be kept up to date via LinkedIn. Some services, especially to individuals, can be effectively marketed through a Facebook page. Certain partners and fee earners can promote their personal profile through regular blogging. Twitter can also be a good way of reaching new clients, especially amongst the younger generation (although many professionals also see Twitter as a good way of keeping abreast of news in their markets).

The Costs – and Benefits – of Business Development

As with all marketing channels, each should be subject to a rigorous cost-benefit approach. The legal marketing mix should involve a range of methods – traditional relationship management, married with online keep in touch campaigns, social media where appropriate, and possibly targeted advertising.
Ultimately, the measure of success should be the return on investment in any of these areas – and those that deliver sufficient levels of profitable work to the firm deserve further investment, while those that consistently underperform (as many traditional methods do) should be jettisoned.

In a hectic business world of networking events, seminars and conferences, a systematic campaign to keep in touch with key contacts is a crucial strategy for maintaining the sustainable business development pipeline.

When it can take 15-20 interactions to turn a relationship into business, and when business roles and relationships are becomingly ever more transient, the danger of forgetting – or being forgotten by – an important contact is an increasingly significant concern.

Cultivating Contacts

Some lawyers will need to keep in touch with many people on a frequent, but perhaps a slightly more impersonal, basis. Others will need to cultivate fewer, deeper relationships with key sources of business. Both have inherent dangers, of being known to many people but trusted by few, or of putting too many eggs in too few baskets, but a successful Keep in Touch strategy will combine the two approaches.

The Broadcast Media

Keeping in touch regularly with a large pool of contacts can be done relatively easily through a generic contact system – such as a newsletter(!). Of course, key personal contacts will also receive this, but it is an ideal way to ‘touch base’ with many people on a regular basis, without the drain on resources (physical and financial) associated with constant networking or generic advertising.

The Personal Touch

Within this larger pool of contacts there will, of course, be the crucial people with whom we have good personal relationships and who are consistent sources of profitable business. These people naturally deserve a more personalised approach, but this should still be monitored systematically so that they are not lost under the mountain of fee-earning work (which will constantly need replacing in any case, if the business development pipeline is to flourish).

Profitable Relationships

Keeping in touch with clients, allies and prospects forms a crucial part of the sustainable business development pipeline – an approach that underpins our Profitable Partnerships Programme, helping partners and key solicitors measurably improve business development and profitability.

In spite of the well-publicised drawbacks of charging by the hour – that the incentive is for firms to spend as long as possible on a particular matter; that fees are largely divorced from the value delivered; and that it promotes the long-hours culture that still dominates the profession – most lawyers have been slow to embrace change. The forthcoming changes in the market will provide the kickstart that many firms need, albeit perhaps too late for some.

Delivery

Some of the larger firms have started to accept the need for new billing practices, but even this has been limited. In any case, this is merely the tip of the iceberg. Firms throughout the market will need to fundamentally alter their processes and methods of delivery, in order to compete with providers well-versed in the commercial imperatives of efficiency and low-cost service provision.

Valuable Services

Establishing the value of services provided without the aid of hourly rates, and away from the simple ‘cost-plus’ mentality prevalent in some areas, will not be an easy task. However, firms must be able to demonstrate clearly the value they bring to their clients, and it will not necessarily be a simple question of price competition. Quality of service and relationship management will also be crucial ingredients in the value proposition.

That said, there will also be areas in which competition will necessarily be with low-cost providers, and firms that cannot compete in terms of efficiency will not survive long. This is something that needs to be tackled now, not as and when the issue arises.

A Different Approach

It will not be enough to change processes or look to compete in areas other than price – differentiation will be at the heart of the new market. Firms that do not know how to market themselves and their brand, to existing clients as well as to prospects, will lose out and will be waving goodbye to more than their old timesheets.

Our regular readers will be familiar with our analysis of the majority of law firms as overwhelmingly fixed cost operations, and of the imperative for forward-looking firms to inject a far greater degree of flexibility into their cost structures. Given the very high proportion of law firms’ costs that can be attributed to ‘people costs’, introducing more flexibility in the way in which the firm employs its people is something we have long advocated and we believe for many will not be optional in the foreseeable future.

The recent recovery in the market, led by a property boom that has been particularly visible in the South-East, has led to a false sense of security amongst some partners. When times are good, a fixed cost structure is not a problem – as the firm can extract more from its permanent fee earners. However, the proportion of firms operating close to their breakeven point is concerning (in recent years this has been around 40% of firms), and the share of costs accounted for by people is often considerably more than 50% of overall expenditure.

This is not simply a problem for tougher economic times. Changing business models (to which we have referred many times) will continue to exert pressure on traditional firms to change their cost structures, and partners ought to be conscious of this imperative to change before it is forced upon them under circumstances in which they have a far more limited range of options.

The ‘Uberisation’ of Professional Services

One specific aspect of the aforementioned changing business models is what George Beaton has described as the ‘uberisation’ of professional services, and what has previously been termed by US academics as ‘eLancing’ or ‘industrialised adhocracy’.

The principle, inspired in its current incarnation by the company, Uber, that is transforming the market for taxi services, is that jobs are allocated (by a centrally managed system) to freelance, self-employed individuals. This has resulted in appreciably lower journey fares in major cities around the world, but its applicability is by no means limited to taxi drivers.

The objections – that such a model simply could not work in a profession that requires such high levels of training, experience and accuracy as the law – are not borne out by current trends. Indeed, top UK firms such as Allen & Overy and Pinsent Masons have already started to embrace the possibilities that such a distributed model could offer.

From Fixed to Freelance

The implications are clear. Highly educated, experienced lawyers who for whatever reason (perhaps they prefer the flexibility of working part-time, or from home, or perhaps they did not quite make it to the next stage in the unforgiving ‘up-or-out’ world of the city) decide to become effectively freelance, self-employed professionals will have the opportunity to do so. Free from the overheads and fixed salaries of traditional fee-earners, such a model promises significantly lower costs to the end-user.

With a theoretically almost unlimited workforce at their disposal and the realistic prospect of offering far lower prices than for their traditional work, such operations will be able to start pitching for work further down the market than before. This will start to encroach on the turf of mid-market firms who, as we have described before, will also be facing competition from below.

Our contention, then, is that medium-sized firms should be thinking now about how they can counter such moves, primarily by introducing much more flexibility into their cost bases – and this starts with the firm’s people. Firms that choose to continue to ignore these trends do so at their own peril.

Making sense of the statistics describing the legal market at the moment is far from straightforward. The predictions coming from commentators and even the SRA suggest financial trouble at firms across the market will lead to failures and consolidation. On the other hand, the economy is growing and professional services even more so – with the legal, management and accounting sector up 7.5% year on year, and property transactions up by 23% on the previous year.

So it seems that different trends are affecting different sections of the market in different ways, with work types (and legal aid work in particular) having a disproportionate influence on some firms’ fortunes. It would also appear that stratification between the winners and losers within each segment is intensifying (which may have the perverse effect of improving the numbers by removing insolvent firms from the sample), which is entirely consistent with the patterns observed in other deregulated markets over the last 25 years.

Surviving the Upturn

However, one theme that firms of all sizes and profiles should note is that this can be a very dangerous time for businesses weakened by recession, as much of the legal sector undoubtedly has been. Economists and insolvency practitioners have demonstrated that in the last 100 years insolvencies have peaked in the early stages of the upturn in the business cycle. This is because businesses use up all their resources in surviving the downturn and do not have the funding available to grow back again. They are in effect “overtrading”. This is a particularly difficult issue in the legal sector because of the long lock-up periods to which firms have been accustomed, making growth in many legal disciplines ‘cash hungry’.

Significant commentators on the legal profession predict major disruption in the top 100 firms (see this report on Financial Stability by Baker Tilly, and PWC’s annual law firms survey (an email address must be provided to gain access to the report)). If these predictions prove to be correct then pressure on all other firms in the commercial sector is bound to intensify. Firms wanting to come out as winners in this competition will have to prioritise key business disciplines and get very good at the implementation. Our analysis of the top 20 attributes of winners in this market starts with the following:

• Financial Focus – on growth and retention, not extraction (American consultant Ed Reeser takes the view that financial problems largely stem from profit distribution – for a copy of his 9 point guide to retaining more profit, email barry.wilkinson@wilkinsonread.co.uk)
• Financial strength – which basically boils down to a solid balance sheet with low levels of debt
• Tight lockup – this is really the key to cash flow management in law firms, and most firms could take at least a month out of their lockup cycle
• Cost structure – flexibility and turning fixed costs into variable where possible are crucial
• Investment – the willingness and ability to invest in order to drive down staff costs and improve service.

Cash Flow Comes First

Before partners can think about how to exploit opportunities thrown up by market disruption they must, first and foremost, ensure the survival of their firm – and this means focusing before all else on cash flow and the balance sheet.

The second edition of our book, Cash Management for Law Firms, has just been submitted to the publishers. The focus is on the underlying issues such as the decisions partners take about the profile of the work and clients taken on, and the terms on which this is done, as much as on superficial issues like the competence of staff in dealing with recovery of debts.

We have seen signs in conversations with partners and their bank managers that firms are beginning to understand what is required, but the LMS financial benchmarking survey shows that 20% of firms have overdrawn profits for 2 years in succession – suggesting that perhaps Ed Reeser is right and profit extraction is the root of the financial problems in the legal profession.

Declining profits and excessive borrowings are the issues that for many firms cause the biggest headache, and this question is currently leading to sleepless nights around the country – but it is often the case that not knowing where to start is the biggest hurdle to making major improvements to your firm’s finances.

That inertia can come from apprehension about the answers you will find if you dig too deeply into your firm’s finances, and some managers find it easier not to ask how profits could be improved because they do not want to acknowledge the scale of the problem.

However, by embarking on a dedicated profit improvement programme, you can quickly identify the scale and source of leakages from your pipeline.

Big Opportunities – Quick Wins

Getting the most out of a profit improvement programme is all about big opportunities and quick wins – and the sooner you get started, the more likely you are to succeed.

The first step in the process, then, is to analyse the current situation and look to uncover the potential opportunities – and, importantly, the scale of the opportunities. These could lie in traditional cost reduction, or in more fundamental changes to the cost structure such as introducing more flexibility in people’s contracts.

The next stage is to turn opportunities into a list of specific actions, ordered by priority. Remember, the bigger the opportunity, the higher the priority and, likewise, the quicker the potential return, again the higher the priority the action should take.

Rationale and Process

The most important thing when it comes to implementation is to get people bought in to the programme, and to keep them on side. This involves clearly articulating both the rationale for the programme and the process that will be followed. Once the programme is underway and the firm’s people are on side, the momentum must be kept up to ensure that returns do not diminish.

How to start a profit improvement programme, identifying big opportunities and quick wins, is the subject of the LIPS Legal webinar Barry Wilkinson is delivering on March 20th (you can get more details and sign up at the LIPS Legal website).

In this webinar, Barry will identify the biggest difference between profitable and unprofitable firms, and explain the most common source of lost profit. He will then go through the top ways of improving your firm’s finances and tell you how to get started with your own profit improvement programme, including:

• Finding the biggest opportunities

• Identifying the scale of your opportunity – setting your outline targets

• Turning opportunities into a list of specific actions

• A simple way to prioritise

• Quick Win No 1 – my quickest ever result – same day effect

• Quick Win No 2 – the two most expensive words

• Quick Win No 3 – 40% in the first month???

• Quick Win No 4 – dropping between the cracks

• Getting the teams onside – launching your initiative and making it happen

• Keeping the Momentum

At a Managing Partners’ conference earlier in February there was almost unanimity about the fact that, however well firms are doing, cash is very tight at the moment – a real cause for concern.

But what should be done?

The first thing managing partners should be doing is talking to their Head of Finance to establish the reasons why cash is so tight.

But it is a particularly difficult time to disentangle a range of underlying causes of cash flow issues. Is it because of issues specific to the firm, or more general economic factors – and if so, which?

Economists point to the long established pattern, that insolvencies peak at the end of a recession, when firms weakened by hard times find they cannot fund their recovery. On the one hand, an “intensive care” banker told me that he was extremely busy because of businesses losing the will to carry on – whilst on the other hand an Insolvency Practitioner said they were busy because of the “funding recovery” issue? So which is it – a weak economy or a recovering one?

At the firm’s level, one of the key issues in Financial Planning and Control is to have considered and robust Cash Flow plans broken down into (at least) monthly segments – and taking explicit account of recurring and predictable cycles.

The Bottom Line…

Unfortunately, many firms put their attention into setting annual Profit and Loss Account Budgets, and treat the monthly elements and translation of Profit to Cash Flow as a largely administrative exercise – often dividing the year into equal instalments. Not only is the P&L account not like that in real life, but Cash flow can swing violently.

Most firms can measure variance from budget in the P&L account but many struggle with Cash Variances – and it is the cash variances which are the key to correct diagnosis and treatment! And the possible causes include:

• Seasonal factors – The Christmas payroll, Quarterly Rent, the January Tax Bill and, of course, Partners’ School Fees. And possibly a VAT bill.

• A seasonal dip in income – most firms will be collecting December’s bills in January – and December is a short billing month for most.

• The LSC budget cycle. Government departments and agencies ration their payments to fit within annual budgetary limits – so processing slows down and queries proliferate, only to be resolved in the Spring.

• Whilst it is easy to blame the LSC, our analysis has repeatedly shown that firms can do far more to help themselves in eliminating the reasons for queries by complying exactly with the terms of the LSC contract – and having strict quality control on all LSC bills – before they go out – sadly, too many rejected claims have been self inflicted wounds.

All of these seasonal patterns are eminently predictable – and should come as no surprise to a well managed firm with sound Cash Flow Budgets and forecasts.

Cash, Profit and Lockup

The cash position will be of greater concern if it is accompanied by significant variances in the P&L account or in the Lockup days.

Lockup management (primarily debtors and WIP) is one of the earlier issues to address in any professional performance management programme. Clear targets (days and £) – based on departmental standards are essential and exceptions cannot be tolerated.

If the poor cash flow is as a result of poor billing performance and therefore reduced profitability, action has to be taken to correct the problem at source. A rapid assessment of future prospects is needed based on the value of the “order book”, or the value (not just number) of recent matters opened.

And finally – what if the variance is positive – growth (or rebound) in work levels leading to a growth in working capital requirements? Unless the Lockup cycle can be changed (always our first choice) additional funding will be needed – and here the world has just changed. Conventional sources of solicitor funding have become harder, but the advent of ABS creates a wide range of possibilities… 

In a recent Business Development workshop we posed the question to our clients – who is your ideal client? The immediate response came back, ‘anything with – or without – a pulse!’

Traditional Legal Business Development

For many solicitors, this has been the case for many years. Any client with work to offer, and with the capacity to pay (or, indeed, for many firms even those who have a demonstrably poor payment history) would constitute an ideal client.

However, the days of casting the marketing net so wide are gone. Reaching clients takes investment, and firms must focus that investment on their best prospects to achieve a sufficient return on what is effectively the partners’ capital.

Successful Departments

Therefore, an important starting point is for all departments and teams to identify their ideal client. This will ideally be done at a team meeting or workshop, to get discussion going and get everyone on the same page.

Identification means more than ‘businesses in our area’ or ‘private clients’. In a B2B market it is important to know what market the client is in; the size of the company and turnover; location(s); and even corporate structure (who is the buyer, and with whom should contacts be nurtured?). Private clients can be profiled by age; wealth/income; occupation (at least in broad terms); location; and likely requirements.

Cross-Selling Legal Services

Different teams and departments will naturally have different ideal clients. However, in identifying the ideal client we not only get everyone pulling together in the same direction, but also maximise opportunities for cross-selling and referral within the firm. This is something that all fee earners (and non-fee earners, where appropriate) should be explicitly aware of and consciously seeking to pursue. The ideal client (especially in private client work, but also often in B2B too) will have a range of needs that different people within the firm can help with.

There are clearly no right or wrong answers – and different people within teams will also have different ideal clients. As long as this is recognised and is part of the Business Development strategy, this can serve to strengthen the portfolio. What is important is for the firm to be deploying its resources effectively – and client profiling forms a key part of this.

We will return to the question of how profiling fits into the Business Development plan in a future post.

Most fee-earners fail at Business Development because the typical sales process involves a combination of constant networking, fishing for introductions, and some direct marketing. This can be an exhausting and demoralising road to travel, and ultimately leaves an insecure pipeline of often small, one-off invoices – not to mention the high cost of sale and the time this takes away from other fee-earning work.

Repositioning Professional Services

However, you can avoid Business Development failure by changing tactics. The crucial tactic in transforming business development is to position yourself so that clients seek you out, rather than the other way around. This does not happen overnight, but the rewards will be worthwhile. The most important criterion in this strategy is that fellow professionals must be able to identify who your ideal clients are. We outlined five key strategies to this end in Sustainable Business Development Post-Recession.

Soliciting Referrals

Getting referrals from satisfied clients should form a key part of any professional’s business development pipeline. However, many find it difficult to hold the conversation – whether through lack of confidence or simply not finding ‘the right moment’. The timing of the conversation is important, as the perceived value of a service diminishes after the service has been delivered. Therefore, during delivery or immediately after successful completion (over lunch) are favourable times to ask for referrals.

Strategic Allies

Just as professionals can expect to achieve more by operating in a niche market, so the benefits of allying with strategic partners in niche markets can be considerable. There is, of course, the danger of relationships becoming unequal or falling by the wayside. However, when nurtured properly, strategic alliances can bring financial rewards to both sides, as well as the ‘kudos’ of introducing a trusted service provider to a key client and, of course, excellent service for the client.

Approaching Business Development in this way will bring a far lower cost of sale and will help to feed a sustainable pipeline of new instructions. Moreover, this approach will free up more time – for chargeable work; for business management; and, ultimately, for life.

As the economy starts to emerge (slowly) from recession, it would perhaps be understandable if managers took the opportunity to return to ‘business as usual’. But in the new legal market, there will be no ‘business as usual’ – firms need to wake up to the new commercial reality, and accept that their business model has to emphasise efficiency and profitability.

The issue of costs in law firms is complicated, and I shall be returning to the subject in the coming weeks to give further opinion – but getting your cost structure right, measuring returns and spending wisely is an absolutely essential part of the approach.

Structures

Broadly speaking, law firms can be described as ‘fixed cost operations’. In some areas these costs can be made more variable, using flexible contracts and outsourcing arrangements, but on the whole there is little room for change in the main outgoings. These costs can be broken down into staff costs, property, IT, professional indemnity, marketing, and ‘other’ (including, unfortunately, write-offs).

People

Without doubt, a law firm’s most substantial outgoings are people-related – salaries, bonuses, drawings, and related taxes. It therefore follows that, as difficult as it may be, the most substantial savings will also be people-related. The tough decisions must be taken early and openly, as remaining staff must be kept ‘on-board’. It may be possible to keep some people on part-time, but your cost structure absolutely must fit with your income profile – and if this means fewer property or commercial fee earners, then this is unfortunately the new market reality. By the same token, there will be potential growth areas that ought to be considered for expansion. Improving profits is not just about cutting costs, and firms must be prepared to invest where it would make commercial sense.

‘Other’

Once the big potential savings have been identified, and action taken to get the ball rolling (bearing in mind that severance costs will create a short-term hole in the cash flow), then other less substantial outgoings can be considered. Major savings can be made by reassessing the firm’s property requirements (especially if there are now a few more empty desks), refocusing marketing efforts on existing clients (see below), and even through some mild investments in technology.

Where the Money Is

However tough the decisions will be, the firm’s survival prosperity while upturn gradually reappears will depend upon swift and decisive action – and a determination to ‘go where the money is’, focusing on the most substantial potential savings, emphasising returns on outgoings and flexibility where possible.