Knowsley Management Services
Legal Practice Management Consultants
I hope this October 2018 edition of KMS “Robservations” finds you very well…
I have again briefly covered for you a few more issues that I observe, from deep in the trenches, impacting lawyers in small-medium firms in Australia, New Zealand and Canada…
I trust you continue to find the content of interest, and value to you in your practice…
Best wishes for an excellent month!
The strongest thread from our consulting in the past few months has been related to assisting firms to close the profit gap impacting revenues (and thus profits) by many hundreds of thousands of dollars each year.
Anyone in business knows that profit only exists when Revenue exceeds Expenses. Breaking even can take 80-90% of the Financial Year! Importantly, in a law firm, Expenses must actually or notionally have Principals’ salaries factored in…or the so-called profit is a nonsense.
Readers who have followed my commentary on the Profession for many years will know that I am very confident that by far the majority of small legal firms in the Western world do not make much real profit, if any at all.
There are some firms of course that do, and do very well, yet very often their profits could still be far better than they are. This would give them a lot more options in running the firm and investing in its future, reducing debt, ramping up remuneration aggressiveness, expanding existing philanthropy, and less cash flow pressures.
Here’s one illustrative example from the last few months…
A two Principal firm has team members with clear potential in their KMSWorkPlans™ to generate Work In Progress annually of $5M. There is acknowledged to be more than enough quality client file work.
The firm has a long history of being able to invoice on average 90% of Raw W.I.P. recorded, so, after allowing for timing issues/file velocity fluctuations, the firm has the potential to Invoice around $4.5M annually.
Expenses before Principals’ salaries are $2.1M, and Principal’s notional salaries are $300,000 each.
True profit should be $1.2M(26% approx.) or $600,000 per Principal on top of notional salary.
In fact, the firm renders only $4.1M and true profit after two notional salaries is $700,000 (17%), or $350,000 each.
A seriously disturbing ProfitGap™ of around $500,000 exists, and the reason is very clear.
Monthly tracking of total actual production against production expectations from KMSWorkPlans™ shows annual W.I.P shortfall to be $600,000-plus…which at 90% Realisation would have produced additional Revenue around the $540,000 mark, or $270,000 per Principal.
That’s more than many Principals earn, and it has just been left on the table.
Some readers may well query what the problem is when the Principals are earning “good” incomes now, but that’s not the point I’m making.
All I’m saying is why invest in the other twenty-plus team members, and all the infrastructure to support them, invest time and money to drive in the new work, go through all the management effort (and some angst), and not reap much closer to the proper rewards those extensive and demanding inputs can deliver?
This is especially important in firms that have borrowings, and borrowings that are considered too high for complete comfort. They could be rapidly reduced.
Whatever the Revenue and Expenses number are, there is a substantial ProfitGap™ in most small-medium legal firms, and it is almost always due to poor application of some resources to the main tasks they should have.
Fixing the gap lies in careful planning, and good communication with team members about what the “non-negotiables” are in terms of their performance.
Performance review processes must ensure that behaviours that are desirable are clear from the outset, and are rewarded. WorkPlans™ must be clear, fair, and achievable by anyone working properly and effectively.
Might some of the necessary management involve what may be perceived to be “difficult” dialogue with some team members?
Very definitely, and having those necessary conversations early, and as often as necessary, and ensuring effective communication, is a very big part of being an effective manager.
My tip this month comes from a different angle. It is not about how to market small-medium law practices effectively but about a very important impact of effective marketing on pricing and profitability.
Few lawyers bother to spend time upskilling on how to identify the right fee for the job, or how to much more often get agreement on that fee from the client.
There is a range of impacts resulting from the lack of skills, from accepting work at fees that are too low for reasonable profit, to losing the opportunity to do the work at all. Both have severe impacts on profitability.
It would be hard to find a lawyer who does not recognise that confidence is an important element, and that it is more likely that they will be confident about the next potential engagement when they already have plenty of good work to do, and that new leads are flowing in very well.
Confidence doesn’t automatically translate to setting the fee better, but it can assist with not taking work where the client pushes back hard and wants the work done at an unacceptable fee.
One important outcome from effective marketing is that the new leads coming down the pipeline are bolstered, more consistent, and lawyers are naturally under less pressure to participate in a race to the bottom on price in order to secure enough work.
The proportion of the new leads involving potential clients who already have an inclination that your firm delivers good value, and will provide a good experience, is increased.
The engagement process is measurably easier at, or closer to, the right fee.
In each issue I look to introduce comment about a management issue that revolves around “the numbers”.
This time I have another interesting example of why it can be so difficult, and essentially pointless, to budget for fees rendered by some team members.
LinkedIn followers will recall my article, “Fee Budgets No Longer Necessary For Private Practice Lawyers”, and the situation here fits the argument well.
A young lawyer, working a 35-hour week in Injury Compensation in one of my client firms, has a WorkPlan™ that requires generation of Raw WIP of $490,000 a year. Anticipated Realisation Rate average in this work in this firm is 95%.
Write-ups from the likes of fee uplifts ranging up to 25% are offset by matters where no fee at all is recovered.
Average age of WIP for members of the team is 550 days. Typically, team members are given new matters as they are opened, and until a “healthy backlog” of client file work is established, they also assist other team members with aspects of their caseloads.
This means that it can be a very long time indeed before Invoices containing any “effort” of a new team member start to roll out, a few green shoots, and much longer before average monthly fees rendered can be in the region of $40,000.
The lawyer has only been on the team five months. Setting fee targets monthly is pretty pointless in this scenario, and all focus is on doing the right volume of work and recording it accurately. Normally I would not have expected any fee flow worth budgeting for by this time.
It now appears that this particular lawyer spent quite a bit of time after joining the team assisting another lawyer with a major appeal in a very speculative matter.
The appeal was successful, and the client obtained a very substantial lump sum in compensation, which was by no means a likely outcome! Recovery of nothing, and zero professional fees, on top of lost disbursements, was perfectly possible.
Last month the lawyer’s share of the total fees invoiced and collected was over $85,000, from his Raw WIP absorbed of just $70,000.
Fee budget at that point was zero.
Trying to work out ahead of time the likelihood of succeeding in the case, the amount awarded, possibility of fee uplift, likely months of the Court handing down its decision and payment being received, and degree of involvement of each lawyer in the case from beginning to end…simply not worth the effort.
As a side-bar there is an interesting practical point for firms to consider in terms of policy on fee allocations where there is an uplift applied. Does it get allocated pro rata to all who worked on the matter, still with the firm or otherwise? With uplifts in some cases up to 25% of already very substantial fees the dollars involved can be quite significant.
I do not see it as wise to allocate fee uplifts to the lawyer who happens to be holding the file ”when the music stops” so to speak.
With all the commentary about Legal Profession disruption even those Principals who would be prepared to make changes to adapt and prosper can find great difficulty deciding what things should be done in their particular circumstances, and with what priority.
Views within a firm can differ greatly, risking paralysis in taking important action promptly.
The Practice Health™ Report is a simple process that brings our great experience to your firm, getting to understand where you’re at, and what you’re hoping to achieve, and giving you clear recommendations on what we would do, in what order, if it was our firm.
As usual, getting perspective from outside the firm can unlock logjams that seemed impossible to achieve internally, and get the firm rolling forward strongly again.
Since last issue we’ve helped firms with all team members’ monthly KMSFeedBack™ Reports, reviewing each one relative to WorkPlan™ and providing embedded comments for the individual team member and management to review and discuss.
We’ve written the first in a series of articles for the Law Council of Australia’s Australasian Law Management Journal, to be published in the October issue, and have a number of others in the pipeline.
We’ve addressed the Annual conference of FICPI Australia, Patent and Trade Marks Attorneys, on “Charging for Professional Services”.
Our article, “The Viability of Small and Medium-sized Legal Practices” was published in the September edition of “Brief”, the flagship publication of the Law Society of Western Australia.
If some of this content has been of interest and value for you in your practice, you will find other related content here…
My LinkedIn articles…I’m delighted that my articles are now going to over 7060 LI followers.
KMSWebsite includes an archive of all earlier newsletters…including all issues of “Robservations” and KMSProfitPower Tips back to 1996.
My LinkedIn Discussion Group… Excellent Management In The Small Law Firm