Effective Human Capital Utilisation

Rob Knowsley looks at how an effective work plan can maximise profits

Published in the NZLawyer Magazine, Issue 207, May 3 2013

This is the second in a series of three articles looking at maximising law firm profit. The first, in issue 206 of NZLawyer dealt with maximising succession options and practice value. My experience is that most small to medium law firms in Australasia generate little, or no, genuine profit after allowing for proper salaries for principals.

The significant under-utilisation of people working in the practice is, in my 39 years professional experience, the most powerful element in limiting the achievement of proper profits in the multitude of legal practices I’ve worked in. The basic causes of this are poor planning, poor communication and feedback, and poor follow-up.

It goes without saying that people are your greatest resource, with the greatest potential to generate revenue for the business.

They also attract almost all of the expenses. Try to think of one that isn’t related to your human capital. It follows that a business intent on remaining financially healthy, protecting the best interests of all stakeholders from time to time, will manage the production levels of its human capital well. Unfortunately it’s hardly ever the case.

It takes a very capable leader or manager to consistently get proper productivity from people, principals, and employees alike. Far too many in management, charged with the task really struggle with it, they often find people leadership difficult and do not consistently apply a sensible effective and fair systems. Therefore results are far short of what is possible with the resources available to them.

Certainly within law firms that we see in profession-wide surveys, I consistently observe what I consider to be unnecessarily low production targets set, but still not achieved.

On the other hand, in firms where there are strong systems for management of human capital we observe production targets that are much higher, often considered by the uninitiated to be either impossible or inappropriate, regularly achieved, without the emergence of toxic cultures in those firms.

There is no particular ‘magic’ in getting the production levels right.

It isn’t simply about hiring and keeping exceptional people. They’re of course great to have, but can be thin on the ground. To my mind, a good leader or manager in small and medium-size firms is one who can get ‘full’ performance from average people, as they will always make up the bulk of your workforce.

The simple answer is in genuinely having a day’s work for each person every business day, in having real clarity around what a day’s work is for that individual, and keeping and rewarding those who can deliver a day’s work for a day’s pay.

People who understand that there is no inherent ‘unfairness’, or unacceptable stress, in being expected to do a full-day’s work for a day’s investment in them, and who accept the need for proper planning, and personal accountability, are the team members you need.

Attention to detail in working with individuals is the key. You must work with each individual on establishing a suitable work plan for them. The work plan is regularly updated as individuals’ circumstances change.

These days it’s even more important with all the work flexibility we are very familiar with to start with a clear picture of what the individual will be putting in for you in terms of days and hours.

What I do is use a simple ‘building blocks’-approach called KMSFirmTime™, starting with an average daily allocation of inescapable, non-negotiable, time for each individual, rather than with a fee target or billable-hours target. To me the traditional approach is completely back to front.

FirmTime™ is that time the practice will purchase from the team member in pursuance of its business plan, and longer-term strategy, that will usually not lead directly to revenues by way of bills to clients, but will do so indirectly over time. Examples are business development, pro bono, CLE, IT, knowledge management, supervision/mentoring, and relevant internal committee work et cetera.

It is a given that each individual will have different skill sets, and that the firm will only have a certain amount of need in each area, so the mix of Firm Time™, and the total daily average allocation of FirmTime™ in your planning, will almost always be different for each individual.

It should be noted that in the relatively few cases where law firms do genuinely plan this aspect of the vital resource, they usually do so on the basis of the same level of allocation for all team members within each ‘class’, don’t break it down carefully with each individual, and tend to allow far too much.

The effect of this is to allow for too little direct fee-production time from the total day of an individual, and the root of the overall low profit problem is well and truly established, and spreading.

There is a thus a systemic problem of planning for revenues that are unnecessarily low, with expenses that are not very flexible, so there is little, to no, scope for proper margins. With the published statistics making clear the majority of people fail to meet even the low-planned production levels, the nil to low-margin problem is exacerbated.

Fixing the problem allows for more aggressive remuneration policies to help attract and keep more of the right types of team members in the face of competitors’ approaches. Obviously, paying someone who isn’t producing well to stick with you just compounds the problem, yet I see it all the time. Getting a team of the right people to willingly do a day’s work for a day’s pay has been the simple key to fixing profitability problems in most legal firms I’ve consulted with. It’s a simple issue, but it’s seldom simply dealt with by a sensible proven system.

Strong Leverage

A very good level of employees with good production from appropriate investment in expenses ensures that, after principal’s proper salaries, there is plenty of profit to be distributed (to fewer principals than may have been customary in the past).

With proper systems in place, there does not need to be quite the same ratio of principals to other employees as was thought necessary in the past. This will not indicate that there is not enough profit to go around, militating against advancing suitable employees to partnership. The reverse is true. Unless employees can genuinely bring to the table what firms truly need by way of new equity principals, offering them a chance to acquire equity interests will simply dilute profit that should belong to effective principals who have established a good practice structure and good operating systems.

In firms with good systems, including marketing systems that ensure enough work is generated, principals’ profits are soaring to heights previously unheard of. Not all principals are quite so good at supervision, training and mentoring, so in a profitable firm these needs can be dealt with by application of skilled resources from outside the principal base, allowing principals to play to their agreed strengths within their own work plans.

As just one example, one firm I have observed in recent times has one equity principal and around forty employed lawyers, so the principal needs to use experienced and capable lawyers, with good knowledge of the firm’s specialist areas of practice, to cover training and supervision. The principal concentrates effort and key skills elsewhere, in business development as just one example of an area where the skill sets of the principal match the firm’s needs.

I mentioned the importance of having enough work for each team member to do. Long ago I coined the term, ‘healthy backlog’ to describe the desired level of work. Business development needs to be carried out at a level that new work is consistently replacing completed work to the point that every person has a healthy backlog of fee-paying work that is not interfering with quality and speed of turnaround for clients.

Unfortunately, with lawyers at least, business development or marketing does not often come naturally, there is often a strong level of scepticism, and there tends to be too little investment in it.

Too little new enquiry can have a big impact on pricing confidence, but it also has a very powerful impact on overall profit margin when there is simply not enough fee-producing work for people to do. Expenses are being incurred with no possibility of revenues at all in that all-important zone, the profit zone after break-even.

In most of the law firms I have been able to help really optimise their profit performance while maintaining their desired service culture, the principals have accepted the need to improve marketing to keep the new enquiry level up to the point where healthy backlogs can be created and maintained across the firm at all times. My observation is that often principals unconsciously allow employees to have too little to do in case they’re needed to assist principals with workload at times when demand surges temporarily.

A wiser and more profitable approach is to keep employees properly busy with a combination of Client Time™ and FirmTime™, and decrease the actual utilisation of FirmTime™ temporarily when there are unusually strong client file demands. This ‘permanent’ resource of an hour or two a day per person can be supplemented by utilising resources across a range of options, from truly outsourced assistance, to increased hours for part-timers, to sub-contracting to professional associates, and a lot of other possibilities.

What a firm needs in professional marketing assistance is of course usually related to the size of the firm, but virtually all firms need some help as so few principals or employed legal professionals have the right skill sets, let alone perceive that they have the necessary time.

The scope of this article does not allow detailed analysis of the establishment of an effective marketing plan, but it is not difficult to ascertain how many files, of what average fee value, a firm or a team needs to be opening to keep all team members with a healthy backlog.

If the file numbers ascertained are compared to the sources of current files being opened it will become quite clear very quickly what apparent sources of the work are not yet being fully tapped by the firm’s present marketing efforts.

Priorities can be set for a range of beefed-up and new programs to drive the extra work in, based on the greatest likelihood of extra work flowing, and bearing in mind the mix of labour and direct funds needed.

Regular reassessment of return on investment is important, as few marketing programmes are ever even close to being ‘set and forget’.

One area I see very often handled badly is basic monitoring of new file sources and projected fee values, such that firms have nothing more than a ‘gut-feel’ where work of the various types is coming from.

This presents a big danger to firms that they will not be properly aware of their return on investment from each area, and thus far too easily drop a programme that is actually working very well.

There is clearly the opportunity for most legal practices to dramatically lift profitability if they organise themselves to keep their human capital properly busy. To do so they need good systems for planning workloads and managing people well, as well as good business development efforts.

In the next article in this series I will address how pricing can also dramatically impact profitability, but readers will readily appreciate that however you plan to price work you are not being given the opportunity to do, because your marketing efforts have been poor, will have little impact on your profitability.