Tag Archives: fees

Strategy on the Back of an Envelope

I’ve just participated in a two-week charity fundraising event, driving 40-year-old cars 5000 kilometres through the Australian outback to raise money for disadvantaged kids. The fleet consisted of 95 pre-1976 vehicles, no four-wheel drive, no engine modification allowed.

This event presented me with a useful metaphor for the business of legal practice. Nearly everyone made it despite himself or herself. About two percent of the field had a well-thought-out, well-executed strategy. The rest of us succeeded because our ability to get out of strife was a tiny bit better than our ability to get into it (sound familiar?).

So too law firms. Leaving aside the elite, how many firms really succeed as a direct result of a well-executed strategic plan? Not a lot, I suspect. In fact, between 1980 and 2007, it probably took effort not to succeed. To fail, one needed a dysfunctional partnership, a bad premises deal or a propensity to pay people way too much: these were pretty much the only ways to stuff it up. Oddly enough, some folk did manage the trifecta.

Times have clearly changed. Success doesn’t just happen by muddling through. Even small firms should invest in this list of must-haves:

  • A well-thought-out strategy – they know what they want to be and what they don’t want to be;
  • A leverage structure with a balance between relatively junior solicitors and senior solicitors – not all one or the other;
  • An understanding by all fee earners of ‘minimum acceptable contribution’;
  • A clear pricing strategy, regardless of methodology (fixed fees, hourly rates, scale, perceived value or whatever). The best performers keep all of these possibilities in their tool kits;
  • An understanding of cost of production;
  • A management structure with clear objectives and the support of partners;
  • Leadership as well as management;
  • Good financial housekeeping (price, WIP and debtor management).

My Edge colleagues and I have written, over the years, about all of the above. We continue to assist firms with pragmatic implementation.

For the benefit of those who are yet to invest in a robust strategy process, here’s a better-than-nothing, back-of-the-envelope approach to start the ball rolling.

Planning Is Key

In my experience, the best self-help first step in the practice-improvement process is planning. I am not talking about a multi-volume document brimming with colourful flow charts and management clichés. On the contrary, I am talking about a discussion that results in a one-page summary that tells every partner (or sole practitioner) where they are headed. The plan will guide those who have been delegated the responsibility of implementing it.

For this planning session, meet as a partnership (or with a key advisor if you are in sole practice) away from the firm, somewhere where participants won’t be distracted by staff or clients. Give each item full and frank consideration. Business plans in small firms are next to useless without consensus. Partners will simply agree in the meeting and then continue doing whatever the heck they want.

I recommend that the discussion revolve around the following decisions:

 

 

The Components

  • What type of work – refers to the type of matters the firm is seeking to offer. In considering this, look at those services that you offer now. Consider what you would like to stop doing – or to stop doing within five years. Having done this, consider what you do wish to be doing and add these offerings to the ones that you want to keep.
  • Partner numbers – refers to the number of equity partners. You may wish to include salaried partners here, but I usually put them into the “employed fee earner” section.
  • Gross fees – refers to the total fee billings of the practice (excluding disbursements).
  • Net profit per partner – refers to the desired profit per partner. When you are considering desired profit, remember that as a principal you should receive a reasonable pay for your time and effort, and a reasonable profit.
  • Employed fee earners – refers to the number of employed solicitors, associates, non-equity partners and paralegals. (Full-time equivalent, so someone may be 0.5 paralegal and 0.5 support.)
  • Support staff – refers to all support staff in full-time equivalents.
  • Space (sqm) – refers to the office space required. The average Australian firm uses about 25sqm per person (including public space like reception and meeting rooms). This is not ideal though. I suggest that you allow for about 18sqm/person. (We are told that best practice space utilisation is about 7sqm/person, but this requires significant cultural and operational change.)
  • IT commitments – refers to any foreseen expenditure on technology such as PMS, litigation support, marketing data base, etc.

The best way to approach these discussions is to fill out the actual numbers for this year, then do Year +5 first. Come back and do Year +1 next, then simply ‘join the dots’.

This is a start – a bit rough and ready but better than nothing.

By the way, our “Annual Variety B to B Bash” raised 2.25 million dollars for disadvantaged Aussie kids – admittedly despite most of us, not because of most of us.

Next year I’ll be one of the planners.

 

Green Shoots Showing in Australia and New Zealand Legal Markets

After a number of years of patchy performance, the legal market in Australia and New Zealand appears to have found its feet and is performing strongly ­– that said, those plucky Kiwis probably climbed out of the slump a little earlier than 2016.

There is always a danger in making sweeping generalisations about an industry comprising more than 15,000 entities, so I will focus my comments on the more established firms in private practice – say those with revenue north of $2m. Even in this group, I will split it into smaller firms (revenue $2m -$20m) and the larger practices (revenue $20m+). Below are my views, or a non-exhaustive list, on what has contributed to the turnaround.

The economy

A rising tide floats all boats and both the New Zealand and Australian economies have seen business shake off the shackles and get on with it. In Australia, there appeared to be inertia in the lead up to the election but once it was over there was no longer an excuse. As a result, after a quiet couple of years, commercial and property practices have kicked into gear as have some of the more specialised practice groups.

A mindset change with staffing

I have noticed partners in smaller firms are not giving as much thought to the nebulous idea of succession. In the past it seemed many firms were carrying surplus fee earners with the vague expectation that many of this crop would be the successors of the current partners. This was despite the current partners having no interest in retiring, let alone transitioning clients.

Now we are seeing leaner staffing levels and busier partners. When the disillusioned ‘successors’ have found greener pastures, they have only been replaced after a cooling-down period if workflow demanded it.

When faced with the departure of a fee earner, a number of firms are replacing them with a contractor and in effect ‘buying an hour to sell an hour.’ This is being made significantly easier with specialist businesses offering this contracting service to the private profession. Some firms also have their own contracting arrangements in place, often with former employees.

Support levels continue to trend downward

The percentage of revenue spent on employee salaries has trended upward for the past 20 years. This is largely as a result of the inflationary increase in the dollar amount of salaries. One thing that has tempered the increased salaries margin is leaner support levels. Among larger firms the average is now 0.69 total support personnel per fee earner. Smaller practices have a much greater range – there, I am seeing some firms with no support outside of the accounts function, through to others that have one secretary for two lawyers plus a hefty complement of back-office staff.

There is no doubt that technology and the familiarity and enthusiastic adoption by the younger generations is enabling the leaner support levels.

Chargeable hours are decreasing

Hours charged to matters has been trending downward for all categories of fee earner for a long time and all indications are this will continue. There are likely a number of factors contributing here, most of which revolve around a view that clients have the upper hand and fee earners are juggling a well-understood client expectation in terms of price and quality with the realities of delivering on the job in a competitive market. Estimates have become quotes, and there is little enthusiasm from clients for an estimate to be revised when the matter is underway.

Price rides to the rescue

The key metrics of hours and profit margin have continued their steady decline. The profit margin is being squeezed largely because salaries are increasing at a faster rate than revenue growth,. Hours have been addressed in the previous section. The only thing that has picked up the slack is rate.

This may seem to conflict with what is being reported or even the general mood in the market, but where firms are able to charge hourly rates, they are doing so at all-time highs. How long this will continue is an unknown, and there is no doubt there is a trade-off between hours and rate; however, we must be about to level out in terms of price in the near term.

What next?

Change in the legal profession has historically been incremental and is likely to continue that way. There are a number of firms which are doing things differently, and new players with a different pitch or approach will emerge.

There appears to be a real appetite to try something new particularly if it leads to reduced overheads or could lead to the firm having a somewhat variable cost base. This means that when there is evidence of a firm doing something particularly well that leads to operational efficiency, it will be a relatively short time before it is adopted by other practices.

I expect the pace of operational change will increase and this – along with an improving market – will lead to better financial times for good firms in the next couple of years.