Tag Archives: planning

Characteristics of Winning Small Firms

It was my recent pleasure to attend the annual conference of a group of affiliated small firms that I have known for about 25 years. Every now and then they ask me to look at their financial performance and we discuss a range of contemporary issues.

I haven’t attended for about eight years or so, and the 2018 conference fascinated me. This group is made up of 25 regional, suburban and a couple of city firms, all relatively small. Average net profit per partner is $700,000. Average profit margin is 39.77%. I know that many large firm partners wouldn’t be impressed by this, but don’t forget that these people go home at 5:30 pm (if not before) and usually holiday for about six weeks each year.

This is what all of these firms have in common. It has been developed collaboratively, through their network, for 27 years or so. All of these firms do the following:

They value management.

Outside large, national and international firms, where most of the profession live, operational management often takes a back seat. In fact, truth be told many partners don’t see management as ‘real work’, certainly not as important as substantive legal work.

By contrast, all of the successful smaller firms that I encounter have at least one management enthusiast in the partnership. These partners are encouraged to develop their interest, to source and disseminate innovative strategies, and are often delegated the role of managing partner.

I am often asked, “How big do we need to be to afford a general manager or managing partner? Surely we’re too small for that?” I suggest that those asking this question consider the event of a client asking them, “I have this business that turns over a few million and employs 20 of us. Do you think it’s a good idea for it to be managed properly?”

Therefore, if you haven’t yet done so, appoint a partner to the role of managing partner. Note that this is not a promotional position with lofty status. It’s a job. Managing partners should be allocated time to manage without penalty; in a small firm, usually 30% fee relief will do.

Don’t appoint someone to the role because they are the most senior or because their practice has dried up and they have nothing else to do. Pick someone who has an interest in doing the job well – and is actually capable of doing the job well. Invest in their development.

They plan and execute.

Good firms are planning regularly. They have a clear vision, widely understood values and a real sense of purpose.

Partners agree on a direction and a number of annual objectives. They may even commit to a five-year strategy. These objectives effectively form the managing partner’s job description.

I recommend that firms of all shapes and sizes share their plans with all staff, measure progress and celebrate success.

They are open to change.

I’ve met too many law firm partners who operate with the “That won’t work because…” default position. Good firms are full of partners that don’t do this. Instead, they grab hold of ideas, often half-baked, and work out how they can make them work.

They have invested in systems.

Good businesses are organised. Successful firms implement operational systems that are consistently observed throughout the practice: they don’t have individual partners or associates doing things ‘their way’.

Successful small firms invest in centralised precedent and document management, legal project management, integrated client management and billing systems, and workflow optimisation systems. They understand that file velocity (how quickly the job gets done) contributes significantly to profitability and that file volume (number of files per lawyer) does not.

They take away the issue of pay.

Highly successful firms are usually generous with salary and staff conditions. Staff don’t sit around feeling undervalued; they put ‘pay’ out of their minds and concentrate on client outcomes.

They are focussed on the client experience.

Good firms understand the purpose of their existence: constant, incremental improvement to the client experience is at their core. It is central to all that they do.

They pay for advice and listen to it.

(Perhaps a little self-serving but nonetheless significant.) Good firms know when to buy advice. Be it big-picture strategy or day-to-day operational advice, management professionals have the benefit of seeing many firms each year, and they usually know what works when.

They tackle one thing at a time.

One of the things that I have observed over the years is that the best firms that I have worked with achieved what they have through a sedimentary approach, layer upon layer. They have managed change incrementally, not through a radical re-engineering process.

At every conference that you attend, with each new management book that you read or webinar in which you participate, just pick one thing to implement. Don’t try to do it all or it will become too difficult, and you’ll become another firm held back by ‘failure to implement syndrome’.

They share with like-minded peers

The group of firms that I spent two midweek days with (firms this good don’t meet on weekends: they have lives to live) have all helped each other to develop and grow great businesses. Over the years they have also become close friends.

It’s a great model.

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.

 

The Importance of Deciding to Do It

Two consulting engagements in the past couple of months illustrate why some firms fly and some firms flounder, particularly in the smaller end of the market.

There were a lot of similarities about the two firms. There were the objective measures such as revenue and number of partners, and you could throw a blanket over each of them in this regard. They were both regional firms operating in buoyant economies where they were the dominant, go-to firm for commercial work in each market. Both were around a two-hour drive from a capital city.

In many of the subjective measures they were similar. The partners liked and respected each other, staff were content with their jobs but not necessarily all with a highly driven work ethic. By all reports clients were happy.

The first firm had been generating reasonable profit for the past seven years. In dollar terms, the returns to the partners had pretty much flat-lined since 2010, but adjusted for inflation the partners were going backward financially. The partners were acutely aware of where they were heading and were all busy paddling to try to correct the course. When we took an objective view of the practice it became evident that any measures implemented to improve profitability were immediately undermined by certain behaviors or expense blowouts. Strategy could best be described as a scramble.

The staffing structure of the firm was out of alignment. Practice groups and individuals had been bolted on without a partner in charge of the group or solicitors having any line of reporting to the firm or management. The firm had disproportionately high ratios of support staff to fee earners. This had arisen for a number of reasons – full-time staff returning as part-timers, fee earners leaving the firm – but it was largely a tail wagging the dog scenario in terms of who had the clout in the firm.

None of these problems had been corrected because the partners were solely focused on staying afloat on a month-by-month basis, which often meant grinding out the fees themselves.

The second firm was a sharp contrast to the first. The strategy session was a little daunting as this firm was one of the most profitable regional practices I have been into. This high level of profitability wasn’t just a spike; they had steadily ratcheted up their profits over a 20-year period. Everything they did was gold standard.

Financial success for the second firm was not really a magic formula. What set them apart is that they actually did what they agreed to do. On the revenue side they were totally focused on capturing all their time, even if clients were being billed on an agreed-fee basis. Partners set the tone, with all billing in excess of 6.5 hours per day. Employed fee earners had a hard floor of 5.5 hours per day, with the subtle message that no one progresses by doing the bare minimum.

Leverage in the firm was fairly low, as they wanted to ensure that there was full utilization. Expense management was also a feature, particularly in regard to the support ratios which were the lowest I have seen in a firm with a ‘traditional’ structure. All fee earners were computer savvy, and the firm had invested a lot of time and money into precedents and workflows to cater for the low-support levels.

I should note that the people in the firm were all happy – they didn’t feel like they were being exploited. They were well paid and just got stuck into work when they were there. The amount of weekend work or late nights the lawyers put in was not excessive, but similar to what one would expect of any successful firm.

The tone of the strategic-planning retreat was for the new crop of partners to decide whether they wanted to continue with the culture and direction that had served the firm very well for the past two decades. Given the financial rewards, it was not surprising they did.

A standout for me occurred when, during a break, one of the partners retrieved a strategic-planning report from 1991 – he had found it in a recent office move. It was essentially a blueprint for success and was a list of around 50 agreed actions and behaviors that members of the firm would adopt. The content of the report was as relevant today as it was 26 years ago – the differentiator is that the partners actually did what they said they were going to do. I am sure that over the years there were a few wobbles, but in essence as new partners came through the practice, they bought into this culture and way of practising.

Perhaps members of the two firms will recognize themselves here. I am not being critical of the first firm as it is probably representative of the majority of firms out there. This article is really about the attitude adopted by the second firm which, all things being equal, is in reach of all of us: It is just about deciding to be successful, and sticking to a plan.

Lifelines for Partners with Dying Practices

3 iStock_000019490857_SmallMost all attorneys at one point or another in their careers come to view their particular practice area to be out of favor. Industry sectors to which their practices are attached are in recession, corporate law departments lose their zeal for pursuing litigation, capital markets – both debt and equity – lose their interest in underwriting the growth of whole sectors.

Attorneys usually take comfort in the assumption and hope that this is only a temporary state – their practice can’t remain in the penalty box forever! In other instances, however, attorneys can feel very exposed: “What if the textile industry never comes back in the US?” (which it didn’t), or “What if the cyclical trough I’m experiencing lasts much longer than I can?” Despite the working assumption of most attorneys that demand will find them in light of their specialized skills, in these situations partners do feel, and in fact are, vulnerable.

Adapting Knowledge to New Contexts

A partner in one of my bankruptcy group clients recently lamented that it would do no good for him to spend more high quality business development time with his ideal targets – the “special assets groups” of banks and non-bank lenders – as there is no existing demand for his services. I suggested that he “unpack” the capabilities and literacies he’d developed in the bankruptcy area. He’d spent a lot of time studying the capital structures of businesses. He’d also gotten very comfortable with disputes that required a deep working knowledge of financial statements, accounting, and numbers in general. Unlike many litigators, he was not a “numerophobe.” Moreover, as a complex litigator in a firm with relatively low leverage and a tightly managed cost structure, for corporate law departments he represented an opportunity to experiment with a different law firm structure. As we developed our thinking further he began to think of himself as an “all weather resource” – a litigator who could handle (non-bankruptcy) commercial disputes involving complex financial projections, or earn-out disputes between private equity firms and acquirers of their portfolio companies, or any litigation requiring a deep understanding of corporate finance, income statements, and balance sheets. In other words, these were “sub-literacies” from his bankruptcy work that translated into other kinds of litigation.

Another recent example involved an energy lawyer in the utility sector who’d spent his career advising on regulatory issues. Over the years he’d helped some constituents in the energy supply chain qualify as “disadvantaged businesses” and compete for set aside contracts. Without diverting his attention from the energy sector, he found it pretty easy to position himself inside his law firm as the “disadvantaged business guy.” Soon, his partners began to pull him into situations with their non-energy, general corporate clients that wanted to also compete for set aside contracts. Still another example involved a healthcare regulatory partner who took a more “vertical” approach to her industry by competing for non-regulatory legal work (generic real estate litigation, non-regulatory vendor disputes, etc.) in the healthcare industry.

The above are good but by no means all examples of how you can broaden your relevance and how you describe where you fit beyond your cyclical area of focus. So get out of your (cyclical) lane. Use your “unpacked” expertise to compete for more business. Go vertical! Go horizontal!