How to seriously “Lose It” when you get a decent bit of growth in your small law firm…

Over the 39 years I’ve been in the Legal Profession I’ve heard many hundreds of lawyers bemoan the fact that they’ve grown their firms and felt as if they weren’t making any more money as a result.

For most, the response seems to have been to rather simplistically assume that “clearly”…bigger isn’t necessarily better!

Well, in fact, if you do things properly it usually is, and better in spades.

A very simple example will suffice to outline the problem.

Take a firm with one senior lawyer Principal, one employed lawyer of mid-level experience, and one capable Administrative Assistant supporting them. The Principal may well be happy to be earning a notional or actual salary of say $200,000, and another $100,000 in genuine profit annually.

Surely no Principal in their right mind would expect to grow to having the full-time equivalent leverage of 7 employed lawyers, 4 Paralegals, and all the necessary Admin Support and back office staff, and be happy to earn a total of $450,000 a year...some years! The extra problems and time demands don’t make that outcome of an additional $150,000 worth the effort.

The more appropriate result would be a salary of perhaps $300,000 if the principal’s duties have increased, and profits of over $1,000,000 annually.

The big jump in profit will come from revenues growing strongly to get much better economies of scale on those expenses that are relatively fixed.

However, if you don’t have excellent systems to ensure proper production, your new additional variable costs, direct labour and associated costs, will absorb most of the new revenues, leaving you not much better, even worse, off, with a lot of extra headaches!

Unfortunately by far the majority of firms that do achieve organic growth do not put in place the necessary systems to keep operations sensible and tight, and I regularly see Principals in small but apparently well-leveraged firms earning many hundreds of thousands of dollars a year less than they should quite easily be earning.

Where most go wrong initially I believe is quite simply, “in their head”. They never ever get to grips with the sheer enormity of the profit a well-leveraged firm should be creating, and therefore start from well behind the eight-ball in planning and executing what is necessary to make it a reality. “Aim low-achieve low” seems all too often to be the reality.

Fee-producing team members are added without proper budgets, cash flows or Business Development programs, and much of their profit-generating potential is lost. 

Production hardly covers costs, and delays in getting fees in through poor file velocity and/or poor credit control means that Cash flow outwards can be much greater than Cash flows inwards.

This is compounded by firms not growing such skills and resources as genuinely needed to achieve a sound Business Plan, rather acquiring the “accoutrements of size”, Office Managers, Human Resources Managers, Business Development Managers, IT Managers and the like, without ever doing anything like a proper cost-benefit analysis on any of them.

“Hire them and the revenue will come” is simply not a sound strategy in this realm!

This lack of care in planning results in accretion of huge costs with nothing like a commensurate growth in revenues.

The self-fulfilling outcome is achieved with great success…a lot more size, little if any more profit, and often less available cash.

Creditors get very persistent, borrowings increase to fund the hungry animal, taxes fall behind, credit card balances lock in around their limits, and stress runs amok.

While the statistics on the Australasian Profession are very instructive on the percentage of firms in the total with small numbers of principals…around 98%...there are a good handful of those firms broadly described as “small” that are very different to the averages, having great leverage and a wonderful opportunity to generate huge, yet perfectly reasonable, profits, if operated correctly.

It is not at all uncommon these days to see firms with one or two principals in which the principals earn total incomes well North of $1.5M per annum…some a great deal more.

Rest assured they do not achieve it by being resigned to a belief that bigger is seldom better.

In law firm profit terms it’s not what you have, but how you utilise it, that makes all the difference.