Tag Archives: strategy

Why is Law Firm Strategy So Hard?

The title of this article poses an obvious question with which many forward-looking, high-performing firms wrestle. In their native state, law firms are not inclined to “manage,” and to the extent leadership mobilizes firms around shared priorities they tend to be at best only the “here and now” priorities. Law firms are not good at seeing around corners. There’s been no need to as law firms have operated in a pretty static market – it’s only been recently that the legal market could be described as fluid and dynamic.

So what is happening now? The artistry of law is being fused with the science of business processes and technology. Unlike many “real businesses,” law is still primarily a bespoke art. Law firms themselves can’t adopt all of the great process and technology advances with which businesses have lived for some time; in short, law firms will have to pick their spots.

How can law firms pick the right spots? How can they transform their business model and service delivery in intelligent ways without getting out over their skis? What can law firms do to get a better handle on the changes in their market they themselves are not going to see in the normal course? Below are a few recommendations that may help firms wrestling with these issues.

  • Build relationships with strategy consultants who build new capabilities in response to new corporate needs all the time. These new capabilities by definition represent strategic issues for the large corporate clients of these strategy consulting firms. New strategy offerings usually spin off all sorts of structuring, regulatory, and risk management issues tailor-made for law firms.
  • Build relationships with Wall Street capital markets firms that research industry sectors. The trends about which you learn from these particular industry experts will spin off industry-driven new legal demand.
  • Understand legal operations twice as well as do your clients. Learn from your clients how they think the management and delivery of legal work are going to change in five years, not just next year.
  • Follow the most innovative IT consulting firms that focus on the legal industry and serve only the AmLaw 100. Technology is usually an exemplar of non-technological innovation that occurs at a process, operational and “manual” (i.e., non-technological) level.
  • Survey the associates. Associates are very invested in informal benchmarking. Based on their anecdotally informed perceptions they will have a view on the strategic priorities you embrace. If you take the time to understand what the associates are “hearing” from their peers at other firms you’ll likely stumble upon at least one multi-year priority that- left to your own devices- would not have made your list.
  • Driving adoption and establishing new behaviors in support of any long-term strategic initiative are strategic in and of themselves. “Get a body on” creating buy-in, thereby sensitizing your lawyers to the worthwhile nature of the discomfort they may be required to take on. For example, if you’re going to ask lawyers to use new client facing technology in the delivery of legal work, give them billable hour credit for the hours they may save by using the technology.
  • Predictive analytics should be deployed wherever relevant. Clients are true believers of data sciences and they will love seeing their law firm relying on it to project matter costs, or business risks associated with certain decisions. Develop a capability in this area and you will have a leg up on your competition.

Transforming the strategy, operating model and service delivery features of a law firm is a daunting ambition. Firms can make some transformational advances without taking on too much if they keep the above ideas in mind and pick the right spots; in so doing, process and technology can work hand-in-hand with the bespoke art of law to create a better product.

Mike White was a practicing attorney for seven years prior to founding and operating two enterprise software companies — Sirius Systems (sold 1997) and MarketingCentral (sold 2007). He owned and managed ClientQuest Consulting, LLC for 10 years serving law firms. He holds an AB in History from Duke University and a JD from Emory University School of Law.

Move the Goalposts and Make Prospect Risk Aversion Your Friend

During a recent client call I sat in on, one of the partners mentioned an opportunity to begin doing work for a global 1000 business (“Company A”). My client happened to be one of the few non-law firms with which I work- a strategy consulting firm that works with global corporates. My strategy consulting client had done a good job of setting the table and matching needs with capabilities, but their dialogue was plateauing. The below bullets reflect how I helped them find a decision catalyst to implement the relationship. One of the challenges was the perception that other strategy consulting firms competing against my client were specifically familiar with Company A’s industry and products; i.e., they had the benefit of reusable knowledge. Below are some comments I offered about how my client could “move the goalposts” and cause Company A to view retaining my client as being a less risky choice.

Make “Risk Sensitivity” Your Friend

► A decision by Company A to work with any of the other more technically oriented consulting firms likely will be a hat tip to risk aversion. Businesses derive comfort from reusable (technical) knowledge; reusable knowledge = no wheel spinning = less time and $ to generate insights = higher probability ROI.

►How can you inject “risk” into Company A’s decision to go with cheaper consultants who bring with them reusable technical knowledge?

► Reframe Company A’s problem from being a technical problem that is a creature of the relevant industry sector to being i) a growth problem, ii) a change management problem, iii) a creativity problem, a iv) it is a . . . . problem, but it is not a technical problem.

► High impact recommendations coming out of this process will require Company A to put in motion multiple work streams that look little like their legacy business; this will be hard. They will need an expert in how to manage de novo, unfamiliar work streams– i.e., the cadence, the carburetion, monitoring and course correcting, etc. A consultant who knows how to build Company A’s technical product is not an expert in unfamiliar, de novo work streams. Getting organizations to do something new for the first time is hard- and it is a discipline in and of itself. The real risk to Company A is in not finding a resource with THIS expertise.

► Technical industry experts with presumed reusable knowledge are more likely to bring with them parochial, insular “me too” prescriptions. How can you convince Company A that it is critical they make a real breakthrough here? That requires thinking (i.e., creativity) unconstrained by the narrow lens of “technical literacy and deep industry knowledge.” Amazon did not go to a retail consultant to go into the web services business, etc . . .

How to Deal with The Price Objection

► Company A is going to need to see what kind of prescription my client could author that is different in kind and capable of generating geometrically more value than another conventional technically oriented consultancy. Can you paint this picture during the sales stage before you have yet to do the work?

► Stories – the best way to move people in big ways to another place is with penetrating individual stories. Is there a case study you could cite where you were chosen at a much higher cost and your client experienced home run impact that clearly would not have been delivered by another “usual suspect” competitor?

Whether you’re a strategy consulting firm or a law firm, “difference in kind” persuasion requires big “goalpost moving”- you’re going to need to get prospects to look at their problem and the opportunity fundamentally different from the way they are likely looking at it when they present it to you. If you “move the goalposts” you win; if you allow them to lazily accept the framing they brought with them before talking to consultants you likely won’t win.

Mike White was a practicing attorney for seven years prior to founding and operating two enterprise software companies — Sirius Systems (sold 1997) and MarketingCentral (sold 2007). He owned and managed ClientQuest Consulting, LLC for 10 years serving law firms. He holds an AB in History from Duke University and a JD from Emory University School of Law.

20 insights you need to run a law firm in the 2020s

In 2021, there can be no doubt that we are living in a digital – and data – age. For most businesses, including most law firms, there is catching-up to do.  Law firms remain ‘data rich but insight poor’ and that will impede efforts to create the agile, insight-driven organisation you need to compete in the 2020s.  This short article offers a simple, introductory step to begin addressing the insight gap.

I encourage firms to adopt a more rigorous approach to harnessing the extensive data they have and creating insights that then support faster, better informed and actionable business decisions.  Law firms do face some challenges in doing this.  Some of them derive from a conventional approach to running the partnership model that has dictated reporting, reward, remuneration and performance management structures. The emphasis has often been on reporting and recording that supports profit allocation rather than profit generation. ‘Getting on with the job’, ‘we have always done it this way’ and ‘gut instinct’ can be valued more than making decisions based on data, empirical insight or trend analysis.

I have developed and used a tailored model for law firm leaders to improve and accelerate the process of converting data into measurable business impact – in the form of improved performance.  This approach synthesises best practices in business intelligence, analytics and decision-making. The Information / Insight / Impact (i3) model has five distinct stages: Information – Intelligence – Insight – Intent – Impact. It is often deployed initially to introduce more structure and rigor to core commercial decisions around fees, pricing, resourcing and profitability at firm, practice, team, client and matter level, but the model is designed to be applied to every type of business decision at every level from team through to the whole firm.

The goal is to take the entire firm to a position where it is genuinely and enthusiastically ‘insights-driven’; where every partner and manager in the firm is constantly pushing for deeper, better and more timely knowledge about team, practice, sector, firm and individual performance and acting on that insight; and where your people demand insights before taking big management decisions about new clients, pricing, hires, resourcing and expect valuable intelligence ‘on tap’, available in real-time and up-to-date.

Generating genuine insights that provide decision-makers with the input they need requires human as well as technology effort.  The advent of Analyst, Business Intelligence, Data Scientist and Pricing Analyst roles in large law firms has been a big trend over the last few years.  I expect that this marks the beginning of a new specialism most modern law firms will need on-board. I have spoken to a number of legal recruiters over the last few years who say this skillset is one of their biggest growth areas. Firm management teams need to understand better how to recruit and deploy these analysts and what the optimum blend of technology and people is.

Before you can begin to make those changes, you will want to be clear about what insight is. There are a few criteria that help distinguish insight from information or intelligence, mainly related to its value; its ability to be used directly to inform rapid business decision-making. Insight is:

Focused – insight is not generated by simply pushing out more reporting and information into the organisation.  Analysts need to understand what the user / decision-maker is trying to achieve and insight delivered should be focused tightly on that.

Usable and Actionable – insights should be influential.  Delivered in the right format, at the right time for the user and clearly explained, with the necessary supporting information for decisions to be made and action taken.  That creates a crucial distinction compared to conventional information reporting.

The result of systematic analysis – by human resources, technology or, commonly today, a combination of the two.

Extensive – typically multi-layered, pulling on multiple data sources and based on a series of ‘what’ questions, to get closer to the root cause.

Predictive – simply reporting a historic metric does not create insight.  Utilising that intelligence to suggest, anticipate or model a future outcome or trend does. An indication of what might happen next is more likely to trigger action from decision-makers.

Analysts and others involved in designing and then delivering insights to managers will often use established business tools, many of them, like Root Cause Analysis and Five Whys, closely connected with Agile methodologies,  The purpose of using these methods is to generate deeper insights that are not immediately obvious when you are presented with a static piece of information or intelligence; the insight is created by digging down, asking more questions, challenging the superficial or initial reading and synthesising multiple strands of intelligence. That mining for nuggets of insight seldom happens in an environment which relies on standard-form financial reports being served up at the same time each month to the same over-busy individuals, without any premium being placed on finding new revelations and inconvenient facts.

How to get started on delivering more insights in your firm? I recommend a very simple start-point which involves assessing how well your firm’s decision-makers – your partners and managers in the first instance – are being served with a stream of valuable insights, ‘oven-ready’ to inform their decisions.  I have refined a list of Business Essential Insights down to 20 questions that every firm should be able to answer at any time.  This list is, needless to say, not a comprehensive directory of every important dimension of performance and measurement.  But it does represent an attempt to pose the fundamental questions that any business leader and decision-maker would be expected to ask and have an answer to at his/her fingertips.  There is a further list of ‘Business Next Steps’ (the equivalent of a ‘deeper cuts’ playlist) which I will save for another day, as 20 is more than enough to start with?

Consider each of the dimensions below and score your firm* against each one using the following ratings (each question scores out of 5, with a highest possible total of 100):

  • I don’t have / don’t know if I have this information – 0
  • We can produce this information but it would require a special report to be designed – 1
  • This information is available at firm level as part of our annual financial reporting – 2
  • This information is available at firm and department level as part of our firmwide regular monthly reporting – 3
  • This information is widely available on-demand with analysis / insight at firm, department and team level – 4
  • This information is widely available on-demand with analysis / insight down to team, client and matter level – 5

*Don’t worry if you need to ask someone else in the firm – that is quite normal. But it does underline the fact that law firms have not traditionally put enough emphasis on the core business processes that distinguish insight-driven organisations.

Business Essential Insights
1.    What we sell Turnover by Product/Service Line. By practice group is fine as a way of consolidating this information but it is not enough: every business has to know what it sells – which for law firms means the services / products / worktypes – ideally by volume as well as value.
2.    What we generate Profit margin – Gross margin after direct costs and a realistic notional Equity Partner salary/remuneration (NEPS)

Running profitability for products/services, practice group, team, office etc. is essential – ‘sales are vanity, profits sanity’

3.    What we make Net margin – Net margin after all costs for team, practice group and ideally for clients and large matters too (latter should include Cost of Sales, include direct sales/marketing)
4.    What clients’ value and like / dislike What aspects of your service do clients regard as most valuable and where is your service positively differentiated from competitors.  You will need to collate and analyse client feedback using a tool. Try to get under the skin of what clients dislike, find frustrating and introduce delay or distraction into their lives
5.    Which features of our service clients use most often Which tools, documents, communication and collaboration media, software and value-added services do clients use, and not use: track using your information systems as well as client feedback
6.    How busy people are Total Time per individual / team / Group average – include all time working (should be the individual’s total time contribution to firm, not ‘chargeable only’)
7.    How productive people are Chargeable (plus any designated ‘investment’ categories – you may decide that some essential activities which you can’t charge for are nevertheless value-adding for clients and should not be reduced) time as % of standard working hours
8.    How much in the sales pipeline Sales pipeline analysis, highlighting target clients, work types and sectors.  Tracked regularly, using volumes and estimated value
9.    What is capital ‘lock-up’ Categorise between healthy/necessary working capital levels and delayed / excess ‘lock-up’. Report aged debt and work-in-progress
10. How are we leaking revenue & profit? For major matters, track ‘leakage’ from total potential revenue & profit, broken down by time write-off, invoice discounting, bad debts, fixed fee/AFA over-run [latter is critical] – you need to understand how & where you lose value
11. What is our client acquisition rate? How many new clients are we creating (monthly / quarterly / annually); usually quoted as a % of existing live clients
12. Which clients are loyal & growing? Track major client fee growth, cross-buying of services from additional practice areas (a good indicator of profitable client accounts).  Track fastest growing clients ‘bubbling up’
13. What is our client churn rate? How many clients do we lose (monthly / quarterly / annually), often quoted as a % of existing live clients – NB this is easiest to measure in retainer / subscription or recurring work practices.  ‘Returning clients within x years’ may work better in less regular practices
14. How does new work come in? Introductions (internal) – utilise ‘fantasy sports’ points for ‘assists’ as well as ‘goals’.  Remember to adjust periodically for actual fee outcomes or profitability
15. Where does new work come from? Referrals and channels (external) identified for all major new opportunities.  Do not allow tracking internal / partner originations to overshadow this activity; you should be doing both
16. What is our real achieved rate? Track actual achieved rate (after all write-offs, discounts etc.) for individuals and report against rate card
17. How we price work Total turnover (and profit) split by pricing mechanism – your firm (and practice etc.) should know exactly how much of your work is on standard hourly rates, discounted rates, fixed fee, capped fee & various sub-divisions of AFA
18. What resource capacity we have Rolling Forward View (3 months in detail, 12 month+ in outline) of lawyer resource based on current workload, matter plans, sales pipeline, vacation plans etc.
19. Are staff loyal & satisfied? Attrition/Turnover rates – Percentage of staff leaving per annum; split between various ‘good leaver’/’bad leaver’ categories. Conduct regular staff pulse surveys or similar.  Track how well staff felt the firm dealt with issues the survey identified
20. Where are people spending non-value added time? Use Total Time recording (where all time is recorded & categorized, including meaningful non-chargeable codes) to identify major admin burdens, downtime, duplications etc. and track impact of process improvement

These 20 Business Essential indicators could be delivered as flat reports or tables of information irregularly but, as my scoring mechanism suggests, that is not really meeting the need of providing decision support input to all of the right people at the right time. Law firms have not always put the emphasis on some of these ‘business 101’ basics that other businesses have; number one above underlines that point – how many leaders amongst your own clients are not able to immediately provide a breakdown of their turnover by product or service, citing their top selling and most profitable lines?

Oh – yes, the scores.  If you scored above 75 congratulations; you are providing much of the essential business information your decision-makers need and are addressing the triple issues of accessibility (making it easy for a wide spectrum of people to access), timeliness (providing up-to-date input for decisions whenever they need to be made, rather than on a rigid monthly or annual cycle) and insight (providing more than just flat reports).  If you scored 51-75; there is a way to go yet in terms of meeting those criteria but you have built a solid base of information on which you can build.  Below 50; I would advise you to make the information-insight-impact process a priority for 2021 and demand more of the people who are responsible for managing your information and reporting environment.  Please don’t hesitate to drop me a line with any questions or comments  you have about the Business Essential Insights, your score and how to address any gaps you have found at chris@edge-international.com .

The key lesson from the i3 model is always to begin with the outcome you are looking for – what business performance impact or improvements are you looking for – and work backwards: asking yourself what decisions (‘intent’) need to be made, how often and by who. And then what insights are required to inform those decisions.

 

This article was written by:

Chris Bull is an Edge International Principal and strategy, operations and change consultant who has established himself as one of the leading advisors to legal businesses in the dynamic and innovative UK market, as well as working in the US and internationally. He has built a reputation as a legal market pioneer and innovator, having worked for all four of the Big Four accounting/consulting firms, been one of the first partner-level chief operating officers at a law firm and overseen some of the largest global legal process outsourcing deals at ALSP Integreon.  Chris is one of the three founding Directors of The Intuity Alliance. His latest legal business book, The Agile Law Firm, will be published Spring 2021: chris@edge-international.com

 

Integrating Strategic Planning and Strategy Execution

Professional service firms are typically littered with uncompleted strategic projects, failed initiatives and strategic plans that have remained in a drawer (or a computer file) almost as soon as written. It has often been observed that professionals are better at ideas and planning than in putting those plans into reality by means of effective implementation.  To state the rather obvious, any yawning gap between strategic planning and its implementation is a mistake.  The job is not done when the firm has produced a finely honed strategic document, beautifully printed and glossily bound – however wide and comprehensive has been the consultation process.  The danger comes from a mindset that assumes that the plan is a lofty leadership endeavour and that implementation is low-level operational stuff that can and should be delegated.

Strategic planning and strategy execution are best seen as an integrated and iterative process in which the broader and more visionary aspects are then cascaded down into action throughout the firm. In corporations, the leaders of the company for the most part craft the strategic choices involving larger long-term investments, and then tend to cascade the more concrete, day-to-day decisions down the hierarchical structure.  Professional service firms (except the very large ones) tend to be smaller and less hierarchically layered than larger corporations but the same thinking applies to firms of all sizes; that the leaders should first agree and set out a broad path and vision which will hopefully stimulate the action that should follow lower down the organisation.  The cascade imagery is helpful to a point but still has overtones of a hierarchical delegation. I prefer the imagery of a closed loop approach (such as illustrated in Table One) which stresses the collaborative aspects of strategic planning without which lawyers at the coal face will not take responsibility or ownership.  It achieves this by facilitating an information consultation and feedback feature that enables plans to be checked and adjusted in the light of experience and outcomes.  In this approach, rather like a ball being tossed and caught back and forth, or round and round, the purpose is to give all the participants in the process the opportunity, at each level, to help decide the implementation steps (and the accountability for these steps) to achieve each strategic priority project, and the accompanying success measures. This process of circling back is particularly important where there might be problems in capability or capacity (human or financial), and to establish what resources are be available and what commitments need to be made to address the execution of any plan that is agreed.  All the time during this consultation phase, other forces and influences will arise to inform the discussions and processes – the firm’s financial health, the values the firm espouses and the competitive pressures that the firm faces being some of those.

After this process has been concluded, it is then possible (as illustrated in Table Two) to design and build a truly integrated plan that links all the essential moving parts and introduces lines of accountability and feedback.  At this stage the broad path can be fleshed out with more detailed projects, timelines and actions. The magnitude of the current challenges to the professional service sector cannot be understated. If Table One is seen as a spinning wheel, then it needs to spin ever more speedily.

Nick Jarrett-Kerr LL.B is a specialist adviser to law firms and professional services firms world-wide on issues of strategy, governance and leadership development as well as all important business issues facing firms as they compete in difficult market conditions. In the last twelve years, he has established himself as one of the leading UK and international advisers to law firms. He has been involved full-time in professional service firm management for over twenty years.

 

A FRESH LOOK AT LAW FIRM VALUATION

by Leon Sacks and Nick Jarrett-Kerr August 5, 2020

The legal industry has consolidated slowly over the years, but this process will be accelerated by the impacts of the current crisis, its economic effects, and the operational changes it drives. Some practice areas will flourish, and others will be negatively impacted. Some firms will need to bolster infrastructure (technology, remote working), requiring investment, while others will have excess infrastructure (office space, back office) that can accommodate growth.

Adopting the right strategy and taking decisive actions at this time are key to optimizing the future of the firm and protecting the interests of its clients and its people. Not only does the current crisis warrant such attention, but it provides a case for change that would not be politically viable during normal economic conditions.   Additionally, there are now very few firms in the fortunate position to be able to rely on organic growth to ensure a successful future.

Most firms will evaluate how to restructure their business, particularly in the light of future financial perspectives. Partners of firms will also be evaluating their own individual status and professional goals. Considerations by firms will include:

  • Acquisition Strategies – enhancing competitive advantage by luring laterals or acquiring competitors (referenced in “Planning for Recovery: 7 Strategies for Opportunistic Law Firms” authored by N. Jarrett-Kerr) or merging with another firm
  • Succession Strategies – maintaining the financial health and strength of the firm through the transfer of ownership to younger partners and/or retirement of founding partners
  • Consolidation Strategies – selling the firm to take advantage of the brand and investment resources of the bigger firm as well as a means of realizing goodwill and to allow older partners to depart (assuming the firm is in reasonable shape)

Such changes will involve valuation issues, be it the valuation of firms or shares in them. While traditional methodologies of valuation may be used as comparative benchmarks, they do not necessarily focus on the real value involved in any transaction.

  • Capitalization rate/multiple of earnings: it is difficult to justify these methodologies due to the absence of a real market/market information on deals between law firms and the differing circumstances of each transaction. Why, as is often touted, should the value be between 1-3 years of profits and, even if it is, how do you arrive at the value within that range?
  • Discounted economic income or discounted cash flow: it is similarly difficult to determine a discount rate to apply to future earnings/cash flow. Any increase of the cost of capital based on risk (the “risk premium”) is prone to be subjective.

To illustrate this conundrum, consider a few situations.

Acquisition

In an acquisition the acquirer will pay for net assets as well as any goodwill since the seller will relinquish control and management of its business, even though its partners may continue to participate in the acquiring firm. The value of goodwill, if any, will depend on the added value an acquirer foresees.

An acquirer is unlikely to want to pay much just for an increase in size of business represented by the summation of its revenues with those of the seller (i.e. 2+1=3) unless that results in a significant increase in profit per equity partner. The latter may arise for several reasons:

  • leverage is increased and the increase in the number of equity partners is disproportionately less than the increase in projected income
  • reduction in infrastructure and support costs (i.e. economies of scale)
  • profit margins of the seller are significantly higher than those of the acquirer and its profit per equity partner exceeds the perceived market compensation for their peers

Note that any value judgements here are based on projections of the acquiring firm’s position post-acquisition and not on the economic income projections of the seller or a multiple of its earnings.

Acquirers are more likely to pay for value in the form of incremental revenue flows and/or the cost avoided by having to develop business (i.e. acquiring a new practice area, a new geographic region or a new client base). This arises where there is a strong synergy between the business of the acquirer and the seller, manifested by

  • enhanced service offerings for the captive client base
  • accelerated ability to compete in new markets
  • complementary capabilities and intellectual capital

The value of goodwill could be significant and again does not necessarily bear a direct relation to the previous or projected earnings of the seller. A seller may argue that their business was developed over years and significant investments were made but, if that is not perceived to generate any value to the acquirer, there is no use in applying traditional valuation methods to determine sales value.

Clearly the degree of certainty that incremental revenues/avoided costs will be realized impacts the value attributed to them. Factors that will influence the outcomes include

  • retention of seller’s client base and the predictability of future revenue from it
  • maintenance of key partners/attorneys and referral sources of seller
  • characteristics of seller:
    • brand reputation and profile
    • nature of relationships (institutional or transactional)
    • susceptibility of business to economic/market changes
    • diversification of clients and practice portfolio
    • level and durability of institutional knowledge and intellectual property

In summary, there are multiple factors at play in determining the value of a firm. Tangible assets are quantifiable but the value of intangible assets, or goodwill, will depend more on the projected post-acquisition dynamic than merely on the ability of a seller to generate earnings in its own right. 

Merger

In the case of a genuine merger, where two or more firms are contributing their resources and net assets to a new merged firm for mutual benefit, the concept is different. Generally speaking, each firm, and its equity partners, will assume responsibility for the realization of pre-merger assets and payment of liabilities and any resolution of pending items will be the subject of the merger agreement. The same applies to settlements with partners who will not join the merged entity.

The initial allocation of shares/equity participation and the partner compensation system of the new merged firm will regulate profit sharing.  Together they should represent fairly the relative value contributed by the parties at the time of the merger and in the future, as well as protecting against dilution. Financial projections of the new merged firm and simulation of participations will be a key part of this process. In essence, the “goodwill” pre-merger is being translated into future profits to be distributed equitably amongst partners.

Restructuring of partnership

Usually there are rules or methodologies in place to govern incoming and outgoing partners, the transfer of their shares and profit sharing. In any case, in contrast to acquisition by an outside party, the partners are familiar with the business and any added value to continuing partners will be based less on synergies and more on the retention of clients and referral sources, as well as the profits  “liberated” by retiring partners.

As shown, valuation is not a simple mathematical exercise and values will vary in accordance with the type of transaction, the characteristics/profile of all interested parties and the value perceived by those acquiring an interest in a firm. Traditional valuation methods, such as multiple of earnings or discounted cash flows, can be used as benchmarks or as a reference point for sellers to establish an asking price for a firm or their shares, but they have limitations. A customized approach analyzing the different elements involved is necessary.

Those in acquisition mode will be searching for value at the most economic price possible. However, they will be avidly calculating the value that any acquisition target can bring to the firm.

A seller, with the luxury of time, can always optimize its own business and organization to enhance its value but, finding a buyer that would find most value in its attributes should be a priority. Offering the buyer greater certainty of increased economic income by, for example, agreeing to a period during which certain key partners remain and clients are transitioned, adds even further value.

A planned transition of ownership also adds value in an internal restructuring. Unless there are extenuating circumstances or disputes, a phase-out of retiring partners, over a period of time, should diminish any disruption of the client base and management of the firm as well as lessen the immediate financial burden on continuing or incoming partners.

In summary, entrepreneurial firms should forget how things were traditionally done in the legal sector or in their firm and should consider how a radical restructuring strategy might benefit the firm, its clients and its people and what smart plans can be deployed to  evaluate how value can be optimized.

Leon Sacks is an international executive with over 30 years’ experience in consulting and law firms. He is based in Miami and currently advises such firms on business strategy and operations with a focus on the Americas (has worked extensively in Latin America).  Contact: leon@edge-international.com

 Nick Jarrett-Kerr is one of the leading UK and international advisers to law firms on business issues, strategy, leadership and management. Contact: nick@edge-international.com

 

 

 

How to Keep a New – and Prized – Client

Getting the relationship right with a new client can often be difficult.  The difficulty of getting it right is accentuated with a major new client, with a large team of lawyers working with multiple stakeholders on the client-side, often layered through the client’s internal hierarchy.

This short article explores a tried and tested way to increase the likelihood of a smooth-running client relationship – through a facilitated ‘Norming’ Workshop, aimed at getting the relationship going on the right footing, or at strengthening an existing relationship.

In 2009, Freshfields Bruckhaus Deringer (Freshfields) was appointed as the official law firm for the London 2012 Olympics, having won the role in a tender process organised by the London Organising Committee for the Olympic Games and Paralympic Games (LOCOG).  The firm provided an agreed quantum of services for free as part of a sponsorship agreement.  Several Freshfields lawyers were provided on secondment to LOCOG and in addition Freshfields provided legal advice as an external counsel to LOCOG’s specialised team of lawyers.

This was an important and high profile piece of work and both Freshfields and LOCOG were anxious to get the relationship right.  Early on in the relationship, LOCOG’s General Counsel decided with the Freshfields’ relationship partner to bring the two teams of lawyers together in a workshop facilitated by external consultants (of which I was one), so as to give the relationship the best chance of functioning at an optimal level.

It is well-established that new teams – including groups brought together as ‘one’ team – go through a staged process often described as forming, storming, norming and performing.  Not all teams make it to the third or fourth stages of this process. Some get stuck in ‘storming’ mode, i.e. dysfunctionality. This is obviously disastrous for optimal working outcomes.

Another challenge of bringing two groups together is the risk of those groups operating as silos – when this is the case each group operates as an autonomous silo or bubble and members of the other group are viewed as ‘out’ group members rather than members of the ‘in’ group or team.   This is similarly poor for optimal working outcomes.

Why a facilitated ‘Norming’ Workshop?

The main advantages to your firm are:

 

  • Each group gets to know each other from the start of the relationship. Or if the relationship is already underway, the two groups get to know each other better.

 

  • The workshop can be used to create a better understanding of respective personalities and working styles. For example a simple exercise can be done profiling the styles of group members and a basic mapping of communication preferences and working styles can be developed.

 

  • Any particular preferences (likes or dislikes) can be worked through before the relationship gets going – or, if the relationship is underway, likes or dislikes can be surfaced and discussed. Do team members prefer to communicate primarily by email? At what point do they prefer verbal communication, either face-to-face or by video or phone?  How does the client like to receive advice?  – short bullet points, lengthier advice with a short summary etc.

 

  • If the relationship has already been running for a while, are there any particular bugbears? Is either side doing something that bothers the other side?  This can apply either way – the law firm can be doing something that annoys the client or vice-versa.  It is better that bugbears are named and dealt with than allowed to fester.

 

  • The workshop is also an opportunity for those at different layers in the law firm and client hierarchies to get to know each other. These informal links can prove invaluable in nurturing a truly strong relationship between law firm and client.

 

In the case of the Freshfields / LOCOG engagement, it was particularly important to get the relationship right, with the looming deadline of the 2012 Olympic Games – and very limited room to correct if anything went wrong along the way.

 

Some additional – and less obvious – advantages:

 

  • Offering a ‘Norming’ Workshop or introductory session can be a real differentiator that adds value to the law firm pitch when trying to win a mandate or panel appointment as part of a competitive tendering process. A new relationship usually kicks off without this type of process, which from experience is valuable to, and valued by, the client.

 

  • The ‘Norming’ Workshop is an opportunity for the law firm to learn additional ways in which it can add value to the client and thereby improve the relationship. The pitch meeting might have provided a glimpse into additional ways to add value, but a facilitated session provides a fuller opportunity to get to know the client better, in a constructive, facilitated, environment.

 

Getting the ‘Norming’ Workshop right requires careful planning and coordination between the law firm and its client:

 

  • The external consultant will be able to guide the law firm – usually the relevant relationship partner – as to how to position the proposed ‘Norming’ Workshop in the most positive and constructive way.

 

  • It is also important that the workshop is positioned constructively internally within the law firm – some members of the team may be concerned that the workshop will expose them or – if the relationship is already underway – surface negative feedback and in fact undermine the relationship. With the right internal positioning these concerns can easily be allayed.

 

  • It is important to establish good dialogue between key representatives from the law firm and the client so that the design of the workshop meets the respective needs of each side. For example in a recent ‘Norming Workshop’ the law firm proposed a session around personality profiling but the external client (a government department) felt that it was too early in the relationship to do this and that the exercise might backfire.  The client wanted to spend more of the workshop on wellbeing issues, as a gentler way to launch the relationship.  Feedback from key stakeholders post workshop was that this was received well by each of the respective teams.

 

  • The design of the workshop may need to go through several iterations. Some issues to consider are:

 

  • Length of workshop – half a day or longer? Is this a deep dive or a very gentle introduction of the respective teams to each other?

 

  • Content of workshop – substantive content? Team profiling / individual profiling?  Balance between large group ‘plenary’ discussion, ‘learning’, discussion in small groups, discussion in pairs.

 

  • Speakers? – is it helpful to have an input from an external speaker, e.g. someone who is an inspirational role model? At a recent workshop the law firm wanted to profile its commitment to diversity and brought in a para athlete sponsored by the firm who was able to talk about overcoming adversity, resilience and the importance of maintaining focus on challenging goals.

The key to all of the above is to assemble a small working team to plan the workshop – this should consist of the external consultant or consultants and key stakeholders from both law firm and client (usually no more than one or two from each).

For further information or to discuss the issues in this article, please contact Jonathan Middleburgh at Middleburgh@edge-international.com or on +44(0)7973 836343
Edge Principal Jonathan Middleburgh consults on senior human capital issues and coaches senior legal talent in both law firms and legal departments. A former practicing lawyer who is also trained as an organisational psychologist, Jonathan has a wide range of experience helping law firms and legal departments to develop their senior legal talent so as to maximise business outcomes.

PLANNING FOR RECOVERY

Originally designed for the Law Society of England and Wales, but relevant to all law firms globally, Edge International Principal Nick Jarrett-Kerr has created a series of four webinars on the topic of Planning for Recovery.  Each webinar lasts about twenty minutes and is available free of charge.

Episode One – First Steps to Recovery (Video 1/4)

Crisis Management and Financial Resilience

  • The need for a crisis management team
  • Leading from the front
  • Business Continuity Planning

Essential Planning Points

  • Creating a common purpose
  • Analysis of market and resources
  • Adapting structure and decision-making

Restoring Equilibrium

  • Communicating to reduce stress
  • Work on physical environment
  • Flexibility for more remote working and technology

Episode Two – Interfacing with Clients (Video 2/4)

Client Contact in an era of social distancing – the positives and negatives

  • Building, Developing and Renewing Trust and Confidence
  • Building the four qualities – legal work, service, accomplishment and relationships
  • Leveraging the opportunities for cost effectiveness and good LPM
  • More communications to learn clients’ affairs
  • Persistence, energy and oxygen

Communicating with Empathy

  • Understanding what keeps the client awake at night
  • Getting to stand in your clients shoes
  • Avoiding the traps

Episode Three – Spotting Potent Opportunities (Video 3/4)

Reviewing practice areas for opportunities and threats

  • Research and analysis
  • The demand curve of emerging, growing, maturing and saturating work
  • Capabilities

Redeploying Staff

  • Skills conversion
  • Finding ways of holding on to staff
  • redundancies

Building an Action Plan

  • Recovering/growing revenue and profit
  • Tactics, tasks, metrics and accountabilities
  • Objectives and revised budgets

Episode Four – Business Planning in a Changed World (Video 4/4)

Reviewing operations and resources for flexibility, resilience and a fresh start

  • Operational Reviews
  • Culture of Resilience
  • Reviewing Governance for better decision-making

Developing bold but well thought out Strategies

  • Making steps permanent
  • Zero Budgeting
  • Radical Restructuring

Ten essentials for a business plan in critical times

The Law Firm Technology Landscape Post-lockdown: Part One

Take a step back and assess the transforming role of technology in your firm with Edge International and our expert technology partners at Lights-On Consulting.

IT has borne a substantial part of the burden of getting law firms through the constant and rapid sequence of challenges faced since the Covid-19 pandemic took hold. Along the way, impressive feats of reinvention have taken place in how (and where, and when) law firms work. Most participants in and observers of these changes, and certainly the team at Edge International, believe much of this reinvention is here to stay. The legal industry has had a catalytic shock to its system which has generated the amount of change we might normally expect to take years.

Because that explosion of activity, with technology at its core, has been so rapid, responsive and – at least initially – short-term focused, there has been little time to step back and examine where we now are, or to map out what should happen next. Such a fast-track sequence of big decisions and actions inevitably leave gaps, unresolved issues, training and communication shortfalls, and risks.

Now is the time, we believe, when all firms must begin to review where they have landed on the technology roadmap and what to do next to secure and the positive outcomes and deal with those open risks and issues.

Edge International Principal Chris Bull consults with legal businesses in the space between strategy, transformational change, and operational efficiency. Deploying and leveraging technology is at the heart of this practice, leading to Chris co-founding The Intuity Alliance, a group specifically focused on cutting-edge advice on legal industry IT, innovation, and LegalTech. Fellow founder Peter Owen leads Lights-On Consulting, one of the most experienced legal IT advisory firms in the market. Lights-On has just released an extensive and impressive multi-part overview of IT ‘considerations for the post-lockdown law firm’ and Peter and Chris have worked together to produce this condensed summary of some of the major points in their articles exclusively for our Edge audience. Links to the full Lights-On articles are provided at the end of this piece for readers who want to take a ‘deeper dive’ into this business-critical subject.

In this first of two parts, we look at the technology issues for management teams as they integrate the emerging new ways of working into their firms, at the same time as reopening offices and bringing all areas of the business back on stream. At the heart of those changes is a shift towards a hybrid, agile office and home worker model; whether as a medium-term measure or, for an increasing number of practices, a permanent one.  The underlying theme for all law firm leaders is the need to balance fast-tracked, short-term decisions and actions with an emphasis on medium-term recovery and resilience.

Technology and your people post-lockdown

The Covid-19 crisis and the disruption to lives and livelihoods that have followed have had a spectrum of affects upon individuals, including the people who make up every law firm. It will take a long time for employers to understand and then respond to all of those affects. Technology has had a crucial role to play in enabling people to keep working – and earning – through the crisis and will take a similarly heavy load in facilitating a return to the workplace, supporting a continuation of remote working or blend of remote and office locations (“bi-modal” operations). But intense use of technology has also created new issues and well-being concerns and addressing these will also need to be front-of-mind over the coming months and years.

A new operating model

To comply with social distancing, offices need to be sparsely populated initially and many firms throughout the world are planning for a sustained period where teams will be operating with a blend of office and home workers.  Many firms are planning for only 25% to 30% occupancy initially due to desk layout, circulation corridor and communal area issues. Alongside that, business continuity planning must contemplate a non-linear progression to the recovery and be prepared for further waves of lockdowns which may force a return to mandated home working.

Positive productivity benefits, potential real estate savings and the rapidly growing popularity of an agile working model are now beginning to feature prominently in firm’s medium to long term planning too. Even before lockdown has ended, we have already seen some firms of all sizes announce a permanent shift away from the office as a default location.

The hybrid agile, bi-modal model, enabling working across multiple locations and at any time, seems likely to emerge as the new standard for a majority of law firms. But making that highly unpredictable and constantly flexing approach to work successful in the long term is a different order of problem to the temporary burst of ‘best endeavours’ effort required to get the firm working from home at the start of lockdown. Even if that were the only priority your IT team had to support over the next year or so – which we will see it definitely is not – it would already represent a massive workload and change challenge.

Adapting your firm to the hybrid agile world

Ironically, health & safety compliance may have gone backwards in the short-term as firms dashed to ensure people could work from home, with very few home workstation assessments due to lockdown and an overwhelming volume of home workers to support. More prolonged home working in a more settled post-lockdown world will impose greater obligation to carry out regular audits and self-assessments that assure employee’s wellbeing. Check your capacity to handle this and tighten up your policies on equipment provision, as well as on compliant home working environments. Don’t forget that a bi-modal world will have impacts across a range of areas from insurance policies and electrical testing to expense policies (for items such as home utilities and telephony charges).

Consider home worker kits to prevent the need for transporting equipment to and from the office. This may only be affordable if firms turn to stocks of ‘second life’, pre-used equipment; which brings its own support issues. Consider a policy of retaining older equipment as spares or for home use.

It is critical to understand that working from home does not mean ‘resting’ and we can already see that home workers easily get burned out, “Teamed out” and “Zoomed out”! Many have gone the extra mile to deliver either internal or external service during a pressured time. You may have already recognised that, but it may be worth re-iterating your appreciation, as the return to office effort will also take its toll in terms of adapting to another set of physical and psychological changes. The main burden of communicating and managing this adaptation process falls on leadership, line managers and HR, but IT have a big role to play too and will often be on the ‘front line’ when it comes to dealing with the challenges people across the firm encounter.

IT support in the new world

Firm and IT leadership both now need to plan for extended hours of service and further waves of heightened IT demand. IT may be the first function needing to reverse furloughs and even considering additional staff in response to the new pressures they will face.

From an IT support perspective, lockdown has meant supporting multiple home working locations with different set-up, connectivity and risk factors. Homeworkers may be sharing parental and home-schooling care or responding to a range of other factors which have created very varied working patterns, including more evening and weekend working. As a result, firms are now also facing extended hours of demand on IT teams.  For IT support teams, it can feel like the job has changed from supporting one office 8am-6pm Monday-Friday to supporting 80 separate home offices 24×7.

IT teams have worked hard and fast to deliver home working but what will the next stage demands on the team be and how should leaders prepare? With a return to some form of office-based working your IT team will also be under pressure to resume some form of physical 2nd-line support; including physical visits required to re-install equipment that people have brought back into the office. We believe other issues, bringing both opportunity and risk to the firm, include:

  • Training – Can we use what has happened to transform how we train people? What doors to new digital training methods have been opened-up and what new approaches and technology will work? Certainly, with new applications and ways of working having been adopted very rapidly and at a distance, really embedding skills and consistency is now a priority. Many larger firms with centralised support models already utilise online conferencing tools to deliver training to their offices, but this approach is now ripe for adoption by smaller firms too.
  • Printing – It is sad to say that all wars advance technology and this war against a virus is doing the same. Widescale adoption of a range of digital tools and a more genuinely paperless way of working has been forced upon lawyers in 2020, including reviewing contracts on screen, e-signing and electronic workflows. If printer-less and paper-free working is possible, now does feel like the moment the legal world has to finally bite the bullet and severely restrict (or consider removing altogether – as we have heard of some firms doing whilst people are out of the office) local printing facilities in the office. Bold firms can benefit from such a change and not simply accept a return to the pre-crisis reflex tendency to print unnecessarily.
  • Conferencing Apps – whilst we might expect ‘peak Zoom’ to be behind us now (they have seen a 30-fold increase in users), the relative importance of virtual meeting and conferencing software in the legal IT mix has shifted forever. These tools are now set to be a critical component of client service, collaboration and the day-to-day reality of how teams work together. Internal IT knowledge and skills in this area, from 1st line service desk right up to strategic application management, needs to be ramped up, especially as the range of options extends and new functionality – such as automated translation and subtitling – promises to make a virtual meeting a more effective and sophisticated option to meeting face-to-face. The immediate post-lockdown period will put your IT services under an extended period of pressure yet again, with an even more complex range of demands than they faced during lockdown itself. It is hard to avoid the conclusion that law firm IT will never return to its pre-crisis shape, with a number of factors driving that permanent change:
  • High Tempo Expectation Management – your IT team has pulled out the stops under difficult circumstances and delivered in days or weeks all kinds of solutions that would normally take months. Has this now re-set expectations of IT going forward? That could be dangerous; IT may have been forced to cut corners to meet deadlines and now have to contend with delivering on the expectation of a high tempo forged during a crisis, whilst bringing back the governance standards partly foregone.
  • Super-user support – the normal support regime where the 1st port of call for basic IT advice is the “secretary next door” has been disrupted by social distancing and remote working. Consider granting those super-users the same sort of screen takeover tools that the service desk has (with appropriate security rights and training). In-team lawyer support can continue while stretched-IT resources can be reserved for the most technically difficult tasks.
  • Hot Desking – for now, flexible sharing of desks is against most governments’ recommendations and so the vanguard of firms which had implemented hot desking to maximise floor plate flexibility are having to reconfigure layouts, processes and technology to ensure that desks are only used by one individual. For those many firms looking to reduce their real estate footprint over the next year or so, this will restrict that opportunity for a period until government advice and individual confidence consider hot desking safe again.
  • Safe ‘at-desk’ support – difficulties are likely to result from hands-on IT work, where it is tough for IT support and the user to stay the 1 to 2 metres distance apart. Remote access and support will need to take more of the strain. All-in-all, it is probably unrealistic to expect physical 2nd line support to return to its pre-crisis format or extent, maybe ever. In a hybrid agile model, IT support is going to be principally remote and digital, providing a consistent offer to workers wherever they are sat on the day.
  • Incidents versus Service Requests – the service team may have spent the last 3 months focussed solely on fixing incidents. As the firm adjusts to post-lockdown working, it is important to use the data from the firm’s Service Desk to ensure IT resources are delivering the biggest bang for their buck – get IT back on the front-foot tackling the most important service requests and improvement projects, not continuing to just react to issues.  

Easy to overlook essentials

As offices are, even if only partially, reopened, IT teams and management have a host of tasks, large and small, to schedule and complete. Some might be easy to overlook but are, in fact, critical to get right. Here is our ‘don’t say we didn’t tell you’ list for firms to be certain they don’t overlook:

  • Re-start testing – during lockdown, with so many people working at home, there will be office equipment that has not been utilised in some time. A physical audit and test is recommended before the doors to offices are flung open again.
  • Check your supplier agreements – do your service level agreements cover support to your business if your people are working remotely or in a bi-modal set-up rather than all office-based? With remote support likely to be required for an extended period now, re-examination of commercial terms may be required. Conversely, if you are now expecting suppliers to come back and work on-site, what provisions do you and they have to put in place to ensure safety and mutual compliance with respective Covid-19 related policies?
  • Internet – examine your internet service contracts and bills and assess whether your set-up is optimal for supporting the volume of people now coming in and going out via the internet line.
  • Hack Amnesty – tech savvy lawyers will have found very innovative ways of collaborating, sharing and working remotely offline in recent months. They may have even tried the odd YouTube hack here and there to work around governance that makes remote life difficult. Face up to these grey areas head-on; you should survey your end users (and your IT staff) confidentially to find out what was good, what got in the way of working and whether they found work arounds or “hacks” to the system that you might want to adopt and share more widely.
  • The Environmental opportunity – a comment made many times in mainstream press coverage of the crisis is that some of the most important priorities which were dominating thinking and gaining momentum pre-Covid have been side-lined and are at risk of stalling. Within your own sphere of influence don’t let that be the case in terms of reducing your firm’s own carbon footprint; there are multiple ways in which technology (albeit also a primary driver of energy consumption) can help push your environmental performance to the next level, including reducing paper and energy consumption.

Thinking one step ahead: what comes after ‘what’s next’?

Over the time span of the Covid-19 crisis so far, IT capabilities have been fundamental in achieving a swift transition to remote working and maintaining client service and team working in uniquely difficult circumstances. That task, though undoubtably challenging, was unambiguous. The next phase is much less clear-cut, as lockdowns around the world ease at different paces and myriad variations on a hybrid model take hold. This feels a bit like the family vacation; the return journey may feel longer and less rewarding than the sudden adrenalin rush of the start of lockdown and those making the journey back are now tired, bored and no longer in the best of spirits.

We have tried here to provide some practical insight into how to handle the technology component of this tricky period. But we have also drawn attention to how the crisis has seeded what we believe will be permanent and significant changes to the way law firms operate.

Firstly, the emergence of a hybrid/agile operating model, with previous resistance increasingly replaced by strong support from clients and employees alike.

Secondly, the acceleration of digitisation across the firm. Your lawyers and support staff will have got used – to varying degrees of success – to getting work done both remotely and digitally. Allowing a reflex return to more conventional ways of working in your firm, even for just a few more months, risks undermining your ability to compete over the next few years. Firms reluctant to fully embrace digital working and who ramp back up their use of paper and retreat from the intensely agile model of the last few months might quickly find themselves literally years behind direct competitors in terms of efficiency, agility, client service excellence, appeal to new talent, value-for-money and, ultimately, profitability.

Those emerging trends are not without serious risks and challenges, but they also offer law firms enormous opportunity to reinvent the way they work and present themselves in a new light to existing and prospective clients and professionals. Coming soon, in the 2nd and final part of this short series, we will turn our attention to the specific digital innovations and trends we think will dominate the legal landscape over the next few years, as the implications of the crisis for the sector play out.

 

Further Reading: the full Lights-On papers summarised in this article are available to read on the Lights-On Consulting website:

https://www.lights-on.com/news/return-to-the-office-law-firm-people-and-workplaces

https://www.lights-on.com/news/return-to-the-office-law-firm-it-service

 

This article was written by:

Chris Bull is an Edge International Principal and strategy, operations and change consultant who has established himself as one of the leading advisors to legal businesses in the dynamic and innovative UK market, as well as working in the US and internationally. He has built a reputation as a legal market pioneer and innovator, having worked for all four of the Big Four accounting/consulting firms, been one of the first partner-level chief operating officers at a law firm and overseen some of the largest global legal process outsourcing deals at ALSP Integreon. Chris is one of the three founding Directors of The Intuity Alliance. Europe: chris@edge-international.com

Peter Owen, our guest author, is the Founding Director of Lights-On Consulting with over 30 years’ experience in IT. In addition to leading the Lights-On team, Peter provides high-level consultancy around future technology aspirations to many legal and professional services firms. As part of this, he regularly mentors legal IT Directors and CIOs. Peter is a founding Director of LITIG, a non-profit organisation designed to support senior professionals involved in all aspects of the implementation, use and support of Legal IT, a long-standing member of judging panels for Legal Tech awards and one of three founding members of The Intuity Alliance. Before setting up Lights-On in 2005, Peter was the Global IT Director for Eversheds for 10 years and held management and operational positions in DuPont in the energy and pharmaceuticals sectors. peter.owen@lights-on.com

Thanks also to Lights-On consultant Stephen Brown for his great contributions to this piece.

 

Zero-Based Budgeting in the Legal Profession

In my many years of managing law firms of all shapes and sizes, budgeting is often looked upon by the lawyers as a chore and a paper exercise which quite often, once prepared, sits in the bottom drawer of the desk and is only dusted off when it comes to looking at the next year’s budget. Sound familiar? This apathy to use an important annual strategic financial tool effectively is an exercise in futility and frankly a waste of time for all concerned. It is also not a very smart way to run a financially savvy business.

There are three basic ways for a legal business to budget:

  1. Incremental Budgeting – Taking the previous year’s numbers and adding an incremental percentage factor (usually between 2% and 10%) to revenues and expenses. There is no real science or purpose to this and it is simply a yardstick of what the firm wants the Fee Earners to produce and the potential cost associated with this. In other words, it’s a “production target” with attributable “production costs,” with no real thought or strategic intent. Often this type of budgeting has very little accountability, and there is no real consequence if the targets are attained or not.
  2. Activity-based budgeting – This is a very intricate and detailed way of budgeting whereby past activities are broken down into their component parts and a profile is built for the nature of work/product in the coming year. In my experience, this is almost impossible to do accurately in a legal business (or any professional-services business, for that matter). This is because legal firms, in general, do not have any idea of the true unit cost per hour for individual lawyers; we are dealing with human capital and there are many variables involved – including poor time recording and time management.
  3. Zero-Based Budgeting (ZBB) –This method is intended to create a budget for each fiscal period from scratch (hence the term “zero-based”), with little reference to the past period. Enabling ZBB requires the firm and its management to focus on a vision and strategy. This is then formalised in a simple business plan for the coming year(s), which is then broken down into revenue targets and the various activities of people, other resources and capital expenditure in order to deliver on the turnover, vision and strategy. This more strategic method of budgeting helps focus the mind of the stakeholders of the business in regard to what they are trying to achieve in the short and medium term, and to prioritise the business investments and opportunities accordingly.

There are a number of advantages to adopting the ZBB method:

  • It promotes the creation of a vision and strategy for the firm;
  • This then is filtered down into the various practice and industry groups;
  • It requires accuracy rather than a broad-brush approach;
  • It creates efficiencies by focusing on current and future aspirations and goals rather than on prior results. In other words, it’s a forward-looking tool;
  • Coming up with the budget requires significant co-ordination and consultation within groups.

There are also a few disadvantages:

  • It can be time-consuming and rather involved;
  • The firm may lack expertise in doing it well;
  • It requires staff time.

Conclusion

The perceived thinking is that ZBB is just a cost-cutting exercise but this is an ill-advised and too simplistic view. If ZBB is used strategically, developing both the revenue targets and the costs associated with delivering those targets, it becomes a very powerful tool to grow a business.

It is my view that many law firms (especially small- and medium-sized firms) do not have much focus on what they are trying to achieve in the short and medium term as they are too caught up in their day-to-day activities. Adopting a ZBB approach forces the stakeholders to have a focused business plan outlining what they are trying to achieve in the next 12 months (and beyond). This “game plan” coupled with the ZBB becomes the “play-book” for the year.

Edge Principal Yarman J. Vachha’s nearly four decades of professional accounting and management work across Asia, Australia and the Middle East include senior leadership and executive roles with global law firms Allen & Overy and Baker McKenzie.

Planning for the New Year: An Approach for Small Firms

This is an article that contains a methodology that I first published in 2000. Nineteen years on, during a time of change, we often forget the basics, those things that made us successful in the first place. Time to revisit.

Small firms (and many larger ones) are being challenged by service commoditisation, increasing insourcing of legal services, increasing costs, and growing pressure from cheaper, new law providers. Having said that, some firms are booming, busier than they have ever been. We at Edge International have observed over many years that the better-performing firms are usually those that have these features:

  • 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; and
  • Good financial housekeeping (price, WIP and debtor management).

None of this is all that surprising. However, many firms fail to implement strategies that they know will benefit their businesses: they think ‘It’s all a bit too hard’. It’s not rocket science (as they say). Running a successful law firm has always been about implementing systems to get the work, do it efficiently, bill it and collect the money. I doubt this will change in my working lifetime.

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, management clichés and motherhood statements. 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.

I recommend a discussion around the following decisions. Meet as a partnership (or with a key advisor if you are in sole practice), away from the firm, somewhere where partners won’t be distracted by staff or clients. Give each item full and frank consideration.

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 stop doing within 5 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 earners” 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’.

Armed with the plan it becomes a matter of execution. Your firm will have greater success if you appoint a managing partner to drive agreed change. This is not a promotion or an elevation in status, it’s a job. I’ll chat about the ‘ideal managing partner’ next time.

A director of FMRC for 20 years, Edge Principal Neil Oakes, PhD assists law firms with strategy and profit growth, partner/director management and profit sharing, key talent management, management structures, and succession management consulting. He regularly conducts law firm planning retreats and helps large and small, private, corporate and government legal organizations to function optimally.