Small and Medium Law Firms…Where To Now For Your Business Management?
Practice Management & Business Skills
This paper was delivered at a Legalwise Seminar- “10 Points in One Day” in Canberra on Thursday 13 March 2014.
The pace of change in the Australian legal landscape continues to be rapid, and there remain many challenges, and opportunities, for Small-Medium law firms. These firms continue to make up the vast majority of firms in Australia.
In this session I will draw on 40 years in the Profession, and my day to day experiences working in or with 1331 Australasian legal practices, to pass on to you some practice management tips and traps that I observe impacting, positively or negatively, on your peers in similar firms as I work my way around Australia and New Zealand.
We have less than an hour, so I have necessarily chosen just six key areas to spend about ten minutes on each, with no particular priority in terms of perceived importance. There will be time for your questions towards the end of the session.
• Alternative Fee Arrangements and Pricing
• Legal Process “Right-sourcing”
• Employment Flexibility and Remuneration of Employed Lawyers
• Business Development (“Marketing”)
• Technology Trends
• Opportunities To Lift Your Profit Strongly
Alternative Fee Arrangements and Pricing
We are talking here “alternative” in the sense of alternative to billing by the hour, a methodology that has come to dominate.
Not only are many clients seeking wider and better options, but in many circumstances billing by the hour can actually be a significant impediment to you in terms of profitability.
This is especially so if for whatever reasons you have set your hourly rate too low for the value you deliver to your clients. Worse still if when push comes to shove your confidence is such that you “find” lots of reasons to not actually charge what you should!
The key point I want to make is that clients deserve a range of options in your fee arrangements, and that, properly-structured and implemented, you will also benefit greatly.
At this stage of development there is still good “mileage” to be had with the big majority of clients if you take the lead on offering a range of options for each project they bring to you, making clear they thereby have real control over their legal spend, in most cases.
It takes a little experimentation usually to get a good range of options established, and it will be ongoing for the foreseeable future, but work I’ve done with a number of firms has shown clearly that while initially not recognised collectively, many firms are already experienced with, and utilising ad hoc, many more pricing options than they thought.
A careful audit of what billing arrangements are in place now for individual clients will usually reveal in existence a small suite of options including fixed fees, fixed fees with “strike-rock” provisions, contingent fees, success loadings, various periodic retainers…some with their own versions of “strike-rock”, time-based billing with and without caps, volume-based pricing etc.
It is important to remember that being very professional and proactive about the discussion of potential fee options for clients, and being very professional about assisting clients to understand the value they should expect to receive for their investment in your services, is a big part of giving clients, and of course prospective clients, professional reassurance.
Avoid doing it at your peril. Pricing and fee options play a huge role in firm profitability, and profitability, coupled with vigorous cash flow management, ensure the ongoing financial health of your business and of the families it supports.
There is a huge range of fee options being used in the market, so many that I readily confess to not yet understanding many of them.
One of the leading consultants working in this field is experienced New Zealand lawyer Richard Burcher, at Validatum, and I commend to you his blog in particular. In a December 2013 article for “Managing Partner” Magazine, re-issued as a blog post, he listed a big range of options. The whole post is well worth a read.
The bottom line in Alternative Fee Arrangements is that you need to further develop what you already use, always being proactive with clients, and accept that if you want a client to utilise your services you need to have a mixture of skill, awareness and confidence, to communicate fully in every matter the value the client will get for their particular investment in this particular matter.
That skill will not come overnight and you will not get it 100% right every time. It’s something you need to learn, practise, and test. There is absolutely no single silver bullet.
Legal Process Right-sourcing…
More commonly known as Out-Sourcing, this is one of the most significant trends you should be aware of and getting some experience with.
Wages costs are the biggest single expense, and premises to accommodate team members are also a very significant factor.
To create flexibility for high work demand times, illness or other absences, and to reduce operating costs, Australian firms are increasingly looking outside their firms, including overseas, for suitable resources, often at significantly reduced cost.
Far too many firms I raise this issue with respond with a plethora of reasons why it won’t work for them, or why it’s just all too hard.
Your competitors are getting involved at accelerating rates, so if they can gain the various advantages, including reduction in costs, you will eventually, belatedly, have to look hard at it or suffer the consequences of the competitive disadvantage.
I have commented recently in a variety of forums that the debate has moved full circle now, from firms asking what could they consider trialling with out-sourcing to early adopter heavily-involved firms looking to identify areas they genuinely cannot…yet!
Potential areas might usefully be split into “Back Office” functions and “Knowledge” or “Legal” functions…
I do not intend herein to attempt complete lists for you…the situation is simply too fluid.
“Back Office”…
Event Management
Library and Research
Transcription/Word processing
Database Management
Data Entry
Payroll
Billing (all the Admin aspects)
Accounts Payable
IT Network
Website design
Website Maintenance
Financial Reports
Secretarial Support…as long as the proverbial piece of string!
Knowledge Management incl. Precedents
Power Point Presentation preparation
Activity Capture entry…I still see many firms where this is not done universally as direct entry by “authors”…many still complete Timesheets, and a few even then enter to the computer system themselves…very efficient indeed!
Call Centre including out of hours “switchboard”…
Client/Market Surveys
“Legal”…
Litigation Support…a very wide-ranging area!
Document Review
Contract drafting
Research and Analysis
There is a wide range of providers and they have their strengths and weaknesses. Choose an initial provider wisely after good research. It should not be assumed that you will use one for all your needs once you get beyond right-sourcing an initial area or two.
This applies also to location. The right provider for you in some legal functions may be in India, while the right provider for some back office functions may be in Australia, The Philippines, South Africa, New Zealand, or Ireland as examples only.
LPO is by no means just for “big” firms…on the contrary it provides small firms with options to help them compete on much closer to a level playing field.
IT has assisted LPO development…and to take full advantage you will need fast, secure, communication. We are discussing IT later in this session, but suffice to say here, as but one example, that cheap Apps purchased on-line for the majority of Mobile phones will turn them into a reasonable quality digital dictation tool, and allow you to immediately email work to your provider from wherever you are.
Savings range across a broad spectrum, with 30% being very common, and 50% being not at all uncommon.
Commonsense suggests start with the low hanging fruit where the results will give strong returns for the dislocation of the process changes. Further, looking carefully at what you do with a view to right-sourcing can reveal functions you do not actually need to do at all any more!
A small practical example provided by an attendee at a recent KMS seminar in Melbourne involved a need to urgently overnight convert two hard copy documents, amounting to some 120 pages, into a Word document.
Even if the firm had the internal resources to get it done overnight the cost would have been high. Scanning the documents to an offshore provider resulted in perfect documents turned around extremely quickly at the huge cost of less than AUD$20!
One strategy I suggest for small firms is to utilise a capable casual resource to identify areas where you should benefit most, do the research, establish the initial relationship, and get a trial going. This will increase the likelihood of you getting moving, with benefits flowing earlier and at relatively low cost.
Trends in Employment Flexibility and Remuneration of Employed Lawyers
I recently started a new engagement with a substantial and long-established legal firm in a major regional centre in New South Wales. It quickly became apparent that the firm had no part-time professional employees, and I commented on how unusual that was these days, especially for a firm of that size.
The seismic shift in gender composition in our Legal profession, coupled with societal changes in people’s expectations of work-life balance, has meant that a huge gamut of non-fulltime roles has become very normal across most firms.
It is not at all unusual to see roles in which a person works less than five days a week, and is located some of those days at home and some in the office, or at client locations. Hours per day also vary greatly, with 4 being about the lower end of the scale and ten the highest I’ve seen in recent years.
The strong trends towards more flexible working arrangements will continue for the foreseeable future for categories of employees that are in demand and have market power. Where there is an over-supply there is much less ability to drive terms, but smart employers should be looking at attractive working arrangements and at reducing the need for expensive premises wherever possible
Some firms have no traditional office at all.
Firms need to be able to cope with the change in the workforce and its expectations, and establish individual guidelines for employees’ inputs, and remuneration systems that work well for employer and employee.
One of the biggest areas of waste I observe in firms is in failure to utilize human resources properly, and particularly the all-too-common inclination to remunerate professional staff based on fees collected.
This focus overlooks the obvious facts of time delays in billing/collecting fees as a result of team member inputs, and also that it is not only inputs that directly produce fees that are important for achievement of a sensible business plan.
I am still encountering far too often firms that are basing remuneration on simple formulas, often as out-dated as one third of collected fees.
The approach is fundamentally flawed for most circumstances, and in my experience will limit rather than grow the fees volume.
Systems involving more common sense can achieve the genuine Win-Win, in which employees get work/career satisfaction along with higher than market remuneration, while the firm gets higher than traditional inputs and outputs.
Planning and goal-setting around a combined package of actual/probable fees and quality involvement in other agreed firm activity leads to better fee volumes and happier professionals.
In the past 26 years I have not observed market pressures forcing my client firms into backing away from this more sophisticated approach to planning utilisation of professional staff, and it pays big dividends all round.
Business Development/Marketing…
Marketing is still far too mysterious in the eyes of many lawyers, when it is actually quite basic, and absolutely essential.
It involves recognizing the needs of clients and others in the marketplace and organizing your firm to meet those needs…profitably.
For them to be more aware of their needs, and aware that you are a suitable player in meeting their needs, people have to be kept informed by you.
I have consistently found that the best way to keep people informed in a manner that doesn’t irritate them is to provide relevant helpful information about topics that may be important in their lives and/or businesses.
Simply put, you don’t need to try to sell people anything, just create “information bridges” from you to them. Happily, the need to not “sell” seems to suit many lawyers!
People who are well-informed are more likely to take action to protect their interests or take advantage of opportunities they have, and the chances that they will contact you are improved by good experiences with you in your information-providing activities.
It’s vital to recognize your different audiences and to accept that different methods of providing information will apply to them.
We all recognise that a face to face discussion may be most appropriate on an important issue for a valued client, and that to reach bigger audiences on slightly less critical issues you may wish to utilize a newsletter, or a seminar/workshop, or increase traffic to your website where you have a full range of relevant helpful material easily locatable by visitors.
Increasing new instructions is almost always a process rather than an event, and you need to plan the process for each of your target groups and execute the steps in the process consistently.
I’d always start with an understanding of what extra numbers of files you need to generate in the first stage of a Business Development plan, for each area of work, and what you hope those new files will be worth on average.
You need to know where the files you currently get come from, so you can focus on areas of most likely improvement for your time and money.
Somewhat surprisingly, even firms that recognize they need more new work often over-state the scope of their challenge. Very recently I have been told by a senior Accredited Specialist, despite an hour’s discussion, “It’s overwhelming…I simply don’t know where to start”.
That comment tends to reflect a faint hope that getting to grips with it isn’t really necessary.
That’s not the case, and breaking the challenge down into “bite-size” pieces can help greatly in making the project more manageable…facilitating getting started.
As just one example, a firm that worked out it was short by $150,000 a year in Family Law fees, for the team it currently has, should be able to identify that it needs only to average an increase of 1.25 files/month at average fees of $10,000/file to close the gap.
It is highly unlikely that the firm is doing all that it needs to be doing in building information bridges to the right people in the market…clients, referrers, and the public.
With the right help the firm can identify which of the present sources of work are likely to be able to provide a small increase annually, and together meet the target total.
Simple activities are then put in place and the results carefully tested so effort and money can be redirected when it appears to be having little effect after a proper period.
The extra files needed from each of your main existing sources of work will be amazingly small…and quite easily achieved with the right level of effort.
The Internet, and things like Google’s AdWords, has to some extent created a sense that additional work should be quite immediate, and in some cases it can be, but increased volume and sophistication of competition will soon have an impact and without a firm being very nimble and investing more strongly, work can just as quickly dry up.
I certainly advocate using the Internet well, for certain types of work particularly, but in conjunction with the kind of relationship marketing through information described earlier. Well-established relationships are far less susceptible to competition from new players.
Lawyers regularly ask me where I feel that social media fits into their business development.
I see things like Twitter, Facebook and LinkedIn simply as more potential tools in your toolbox to utilize if appropriate in the various information-based bridge-building projects you need to have.
For some individuals one or more may be quite useful, while in other situations I would counsel that there are far more useful tools to use.
If you aren’t prepared to invest the time to careful research any one of these options, and build up your skill sets, find an affordable expert with testimonials and a track record that satisfy you and establish and implement a simple plan with their guidance.
Monitor closely that you are actually getting more new files as a result after a reasonable period of implementation. It is also vital that you keep monitoring as good results initially can easily slide as your competition changes its approaches and increases in volume.
A word of warning…the biggest fault I see in law firms in this field of endeavour is in failing to properly monitor the apparent impact of Business Development activity on new work, and that includes careful recording of all the information you can get on new work sources, including existing clients and referral by them.
I.T. Trends…
It doesn’t require me to tell you that there is a phenomenal range of devices and software available now, and quite often at very low cost, but you need to keep your own end goal in mind.
IT investments are not for the sake of having them, or simply to make life easier. In my view they need to be utilized to make people more effective, more productive within the time available for the cost invested in them.
More and more Cloud-based offerings are being made available to law firms and with increasing levels of security, and properly utilised these can provide great savings for law firms in various areas, including the necessity to upgrade hardware such as servers unnecessarily.
Watching the debates over the years has been interesting. In general too many law firms are too slow to adopt sensible developments that do genuinely enhance productivity and speed up turnaround.
As just one very simple example, too many firms have not latched on to digital dictation and appropriate use of voice recognition. When coupled with the ease of transmission via email and the potential for out-sourcing, digital dictation opens up a wide range of options for firms to get work prepared at lower cost and faster, almost anywhere in the world.
Another area where lawyers need to move faster is in better understanding the practical uses of equipment they already have, including smartphones, tablets, laptops and personal computers.
Many of these have very useful practical ideas built in, or downloadable as a cheap App, that improve productivity by speeding up tasks that used to be menial and time-consuming.
Time may not be money in the future in the narrow sense of billing by the hour, but getting through necessary tasks faster and with less stress and frustration is a big factor in completing more work in any given period, and that has a big impact on profitability. More revenue with the same or marginally higher costs improves profit margin strongly.
Some key areas to look at to improve your profit strongly…
Apart from the opportunities in out-sourcing discussed earlier most firms with low profits and tight cash flow have long since explored most avenues for keeping expenses down.
Joining a co-operative purchasing arrangement with other firms has benefits but you’re not going to do a heck of a lot for your profit by saving on copy paper, or even interest rates or insurance premiums.
The richer pickings lie elsewhere in my wide, and continuing, experience.
With relatively fixed Expenses the quickest route to greatly improved profit is to get revenues up a bit, and that can be done by having your expensive people resources spending closer to reasonable amounts of time actually doing billable legal work, and having the confidence to charge properly for all or most of that work.
Of course having enough work to do is important within this equation, so Business Development is essential, not just to ensure you have enough to do, but also to ensure that you have more than enough enquiry for your services so you can have some control over the quality of the work you accept, and its fee levels.
You must not be in the position of mainly getting asked to do the work other people don’t want. (Think “John West and salmon” in reverse)!
In the debate about the future of the billable hour, please do not become confused about the necessity to track where you and your employees are investing your time.
Humans are infinitely fallible, and in almost every case, grossly over-estimate the effective time they spend on the right things in their working day or week, if they don’t track it accurately.
Interestingly, when they don’t track accurately, they also grossly under-estimate the time they have put into individual client matters.
When coupled with any lack of confidence and courage in estimating, quoting and billing, revenues get hurt badly by less time than necessary being spent on billable work, and less being billed than appropriate on that under-production.
We’re not talking “peanuts” here. My assessments of many hundreds of lawyers over the years indicates that lawyers who do not properly plan and track their investments of time, and lack billing confidence and courage, still bill on average $150,000/year less than their peers who get mostly get it right.
Simply put, that can be the difference between a firm being profitable or not.
People are potentially the key drivers of proper profits in almost all law firms, yet almost never in the 1331 small-medium law firms I’ve looked at closely have the majority of people been really effective.
Almost universally they’ve been very nice people, well-educated, and well-intentioned, but very often afraid to genuinely put their actual performance under the microscope in search of far better outcomes.
A big part of the answer is to stop the over-focus on rendered/collected fees as the main performance indicator.
There are many roles that need to be performed in a successful legal firm, and many tasks within each of those roles.
Some of them are directly responsible for fees being billed and some indirectly.
The biggest inhibitor to revenue improvement across the bulk of the legal profession is the focus on what are considered “reasonable” averages for billable hours.
In almost all cases this leads to too little time being spent on client legal work, rather than too much as the myths suggest.
In many of the practices I have assisted over the years the proper planning of how people spend their time, and careful monitoring of that, is the first time it has ever happened, and it makes a huge difference to outcomes.
Without working any harder, just a lot smarter, people get a lot more of the right things done than they ever have before.
The simple starting point is to accept that everyone is different.
For a wide variety of reasons people will actually want to work in, and on, their legal firm for different hours a day, days a week and weeks per year…that’s a given.
Rather than focusing simply on what they should spend per day in potentially billable hours, the starting point should be an examination of how much of their individual day should be spent on FirmTime given the firm’s Business Plan and the interests and skill sets of that person.
By this commonsense method you arrive at different goals for FirmTime for everyone both in volume and nature.
Automatically then the ClientTime hours for everyone are also different.
To illustrate simply, a principal managing the practice may need five out of eight hours for FirmTime as a daily average…leaving three for ClientTime, while a first year lawyer may need 1.5 hours a day FirmTime average(including a lot of on-the-job training) leaving 6.1 hours a day on average for ClientTime.
Both because it is important work, and because its utilization directly impacts available ClientTime, investments in FirmTime are tracked as carefully as all investments in ClientTime.
Using this approach for over twenty years I have been able to get law firm revenues up to where they should be, creating excellent margins over the largely unchanged expenses.
Improvements in profit of 100% are a given and many times that quite often achieved.
Finally, a comment on the psychology of pricing. Don’t underestimate its importance.
Learn from the retail arena where buyer psychology is well understood.
Don’t estimate or quote in round numbers on most occasions. Almost all your clients and potential clients will view $985 as considerably less than $1000. This will increase take-up of your proposals.
On the other hand, those who will see good value in, and agree to, $1000, will in the main also have found $1285 equally acceptable. If your true profit on $1000 was 20% or $200, your profit on $1285 is an improvement of over 140%.
If almost all proposals you put out there are taken up you make like to consider if you are setting your price point way too low and dramatically impacting your profit.
Lawyers may wish they didn’t need to learn about such matters, but to be concerned about levels of profit and not take the time to come to grips with these sorts of fundamentals is not a sound approach.
