I trust this Spring edition of KMS “Robservations” finds you in good health and prospering…

In this edition I have again briefly covered a few more issues that are impacting lawyers in small-medium firms in Australia and New Zealand…

I hope you find the content of interest and value to you in your practice…

Robservations…

There has been a worrying thread in some of the research recently into law firm profitability showing that actual fees rendered by employed lawyers are falling on average despite fee budgets rising.

That does not happen in my experience in firms where fee budgets are arrived at as the result of a careful, sensible, process of aligning human resources to the firm’s Business Plan.

So why is it happening so regularly elsewhere?

In his “Law Management and Marketing Newsletter” #99, Joe Reevy recounted his experience of attending a briefing session in the United Kingdom for solicitors by PKF Francis Clark, Chartered Accountants and Business Advisors, in which the presenters in one session outlined their recent benchmarking.

Among other points he made it resonated strongly with me that Joe said, “One of the things that just leapt out at me from the benchmarking data was how little of the available fee-earning time firms have is spent fee-earning!”

In recent years the reality behind poor revenue production has become more and more obscured by debate over increased client demands for value, the “death” of charging by the hour, the need for real innovation in the face of continuing rapid change, an increase in competition, and ever-increasing regulation of the Profession.

In my experience where production is poor relative to available resources it is almost always able to be pinned to poor planning, poor marketing, and poor people management.

This tends to lead to a serious miss-match between what people are reasonably capable of, and what they end up producing.

Ironically there is often far too much emphasis on Revenue budgets, and far too little effort is put into genuinely understanding what people are doing, and should be doing, that is in the firm’s best interests…short and long term.

The more difficult, but much more rewarding, approach is too often seen as too labour intensive.

In fact, very large increases in real profit are easily achievable with the correct approach, making the extra time investment more than worthwhile.

In the correct approach, each fee-earner should be allocated a revenue budget that reflects the reasonably likely outcome of time invested directly looking after clients’ legal challenges and opportunities, taking into account all significant factors for that fee-earner as an individual working with the rest of the firm on its Business Plan.

With actual time invested by employees still trending downwards in most small-medium law firms, exactly how the available time is spent is more critical than ever before.

The opportunities to protect profit by simply easing hourly rates up each year are rightly diminishing.

For now, the real “pot of gold” lies in shifting a good slice of the “valueless time” from hypothetical investment in FirmTime™ to actual investment in ClientTime™.

This is achieved not by requiring more from employees within the same total time invested, but by carefully evaluating whether all of the very large slice of the average employee’s day allocated (often without any real planning at all) to FirmTime™ is a) resource sensibly budgeted to be utilised that way, b) resource actually invested that way, and c) whether the outcomes thus achieved are worthwhile returns on investment.

If the large slabs of time so “invested” are producing outcomes that are not really worth having, the employee in question may well get greater satisfaction from applying their primary skills to directly looking after clients for more of the current working day.

If resources are not to be reduced, and I do not advocate that strategy unless there is no alternative, there will usually need to be more available client file work, and the firm wanting to be truly successful may well need to get more serious about Business Development (and heaven forbid, Marketing!).

The bottom line?

Where the culture of the firm is not right, and the strategies and systems are not correct, there is no logical connection between Revenue goals set and what needs to be done consistently across the firm to achieve them.

The likelihood of Revenues reaching budgets is doomed from day 1.

The inevitable gap will destroy most, if not all, of the potential profit, with all the short and long term consequences a business with little or no profit always faces.

KMS Common Sense Law Firm Marketing…short sharp thoughts from the trenches…

Comments made by new prospects or clients about how they came to approach you often contain keys to your next focal points in your marketing, or at the very least confirm that you are already on the right track.

These days it is quite common to have new prospects or clients provide unsolicited feedback about what it was they liked about the “feel” of your firm they got from your content on the Web.

They are usually very pleased to have found the right “home” for their problem or opportunity, and while in that frame of mind can be quite specific about what they liked.

Thank them promptly and appropriately, and at the right time explore whether they would mind converting their much appreciated ad hoc comments into, for example, a review on Google or a recommendation on LinkedIn.

The “take-away”?

Encourage all team members to be aware of the high value of new client/prospect feedback, and to consistently bring it to the attention of the right people in the firm so it can be discussed, celebrated, and, as necessary, acted upon.

Pricing Heads-up…

Far too often I encounter lawyers who are clearly jealous of what they perceive to be the fees charged by some of their peers, quite often accusatory and usually indignant.

Surprisingly, quite often it transpires that they claim to be so busy they have not had the time to investigate what they themselves might be quite properly entitled to charge, for even their mainstream services currently generating big percentages of their annual revenues!

On closer examination, in many cases it is clear to me that they are significantly under-charging for the quality and speed of services provided.

The real irony here is that quite modest improvements to fees charged can have a very dramatic impact on profitability because the extra fees they are genuinely entitled to ask for (and will in the main get once they learn how to properly demonstrate value) have little or no new expenses component.

So for example, a modest lift in fees rendered of just $50,000 a year will represent a 25% lift in profit to a Principal earning $200,000/year.

If the $200,000 was not all profit in the first place, rather $150,000 notional salary and $50,000 real profit, an extra $50,000 actual profit is a 100% increase.

The bottom line… someone who has the time and energy to waste in angst over what they perceive their peers charge has the time to do some basic homework on how to charge more appropriately themselves, and start reaping the rewards.

Lies, Damned Lies, and Statistics…

In each issue I try to introduce comment about a management issue that revolves around “the numbers”.

This time I’ll focus on profit margin.

Does “Profit Pac-Man” eat your profits?

The Pac-Man video game has been around for over 30 years. No doubt some readers grew up on it, and will be fully aware that Pac-Man was a friendly, carefree, individual…running about in a maze, chomping his way through things.

All those years ago, watching my kids play the video game, there seemed a powerful “inexorability” about Pac-Man.

Well, it’s almost an identical process that I see in the destruction of the profit potential in so many small-medium law firms.

The potential real profit after Expenses and the notional salaries of Principals lies in a band of potential revenue “at the outer edge” of annual fee production so to speak. Many surveys show that band as 1%-15% of total Revenue.

The profit destruction starts at the very edge and works its way inexorably back inwards towards the real break-even point, at which point the firm has done nothing more than cover its Expenses and a modest notional salary for the Principals. At that point for all the investment and effort it is generating no profit at all.

Profit Pac-Man gets unleashed the instant the firm does not have sufficient paying work to keep its resources properly busy, or has the work but is not getting the right volume done.

Take a simple example of a sole Principal with a few staff with a total capacity to turn over $1,150,000 annually in professional fees.

Let’s say $850,000 is needed for Expenses and a modest $150,000 is set aside as the Principal’s notional salary. On the Revenue capacity the Principal is aiming at true profit of $150,000 too.

For the sake of argument let’s assume that to turn over $1,150,000 the firm needs to process 32 files a month on average worth an average fee of $3000.

For the profit destruction process to start rolling, and completely devour the $150,000 target profit, either the firm needs to fail to open about 4 files/mth on average, to open them and fail to do the right volume of work on them, or fail to charge properly for the work done. Most often, some combination of these possibilities causes the big damage.

When you consider that the big majority of small-medium firms have neither an effective Marketing plan, nor effective, properly thought out, WorkPlans™ (mini Business Plans) for team members, is it any wonder that all the respected surveys of the Profession reflect quite poor genuine profits in most small-medium firms?

Bear in mind too that the firms that respond to the surveys tend towards being a bit better organised, so to a large degree the relatively poor results don’t even include and reflect huge numbers of poorly organised firms that do not opt in.

The bottom line… true profit margin in small-medium legal firms is usually modest, and also quite “fragile”.

To actually generate decent profit margins requires clear planning with excellent systems, well-operated.

Monthly Billing targets…do you really need them?

At first blush the question may seem a bit out of left field! After all, in many firms it’s taken a very long time to get relevant people to focus properly often enough, and regularly enough, on billing.

Nevertheless, in far too many firms I observe billing targets causing lawyers (and Management) all sorts of angst, almost every month.

In some cases, pressure to meet billing targets causes lawyers to bill clients at inappropriate points, and also to bill more than appropriate.

In other cases I see lawyers failing to bill much more than their target when they properly could, simply because the month to month target-related culture of the firm means that it makes better sense to hold off billing so next month’s results are better than they otherwise would be.

That’s not very mature financial management and not usually in the overall best interests of the firm.

Surely the proper way to bill is at the correct time in each client relationship, taking into account all important factors.

There will always be fluctuating factors impacting the right times to bill, so common sense suggests that every bill properly able to be rendered should be, hopefully to offset those bills that sensibly should not be rendered just yet.

“Unders” and “overs” relative to targets should be embraced if arrived at for the right reasons in each of the client-firm relationships.

Surely the correct approach is to have a good understanding of the volume of work the team should have and be doing, do the work on time, and bill it all as soon as the work and the relationship warrants it, in each individual matter.

If that basic approach is followed diligently the billings at any given time will be optimal, and you can’t do better than that no matter what the target numbers are!

Thought for the day…are you walking or wandering?

Managing excellent people is a “walk in the park”.

Managing everyone else takes real skill because managed inadequately they’ll perform like the proverbial “Brown’s Cows” …and take many a “wander in the pastures”!

How many of your team are truly excellent? Do you need to be managing some other team members much better?

KMS Services…KMSManagementSupport™…28 years young!

How often have you wished you had ready access to a genuinely experienced lawyer and Manager for input on a challenge or opportunity facing you in managing your practice?

Larger firms often have suitably experienced team members to turn to in HR, Marketing, Performance Management, FeedBack Reporting, Pricing etc., but far too often small-medium firms are left feeling they need to “go it alone”.

For 28 years now we’ve been providing KMSManagementSupport™, and currently have member firms that have been members continuously for well over twenty years.

Whenever members have an issue to discuss they simply email an outline and tee up a telephone discussion with me.

KMSMS subscriptions are modest, based on firm size, are payable annually, half-yearly, quarterly or monthly to suit your cash flows, and are usually fixed for at least three years.