What’s Wrong With Most Of The Legal Profession When It Comes To Business?

Reflecting on 25 years consulting to the Legal Profession in Australasia at the end of March I unfortunately returned yet again to the resignation that not nearly enough has changed. In the vast bulk of the Profession business practices are simply not improving quickly enough.

The same old mistakes are being made, and plenty of new wheels “invented” with demonstrably flat sides!

This is consigning the Principals in the huge majority of firms to poor returns for their efforts and investment.

The conventional wisdom that prevailed for decades that there would be no room for small law firms, and that major aggregation trends would persist because small law firm practitioners would otherwise not survive, has proven to be plain wrong.

However, as I address later, the point is not mere “survival”.

The structure of the Profession varies of course between jurisdictions, but the last published statistics on the make-up of the New South Wales profession (January 2013 for 2012) are instructive, and very relevant to the issue of business-like practice management.

It doesn’t take much experience or imagination to realise that most firms with 5 or more principals can be expected to have reasonable management, strategies, and systems.

Unfortunately for the Profession as a whole, those firms make up only 2.1% of all firms in the New South Wales example!

There 97.9% of firms have between 1 and 4 principals, with 87% of all firms being Sole Practitioner firms. Those Sole Practitioners employ 2323 lawyers, an average of just half an employee lawyer per firm, demonstrating that a huge number of Sole Practitioners are just that in the wider sense of the term, genuinely “flying solo”.

The challenge for Sole Practitioners, and indeed for all small law firms, is to get to grips with the key business issues that make a real difference to moving well beyond mere survival.

The majority of such firms have Principals who do want decent incomes, good succession options, reduced borrowings and cash flow stress, professional satisfaction, and some real fun in business.

There is no doubt that there are a lot of balls to keep in the air in running a small legal practice, but that’s the challenge facing about 98% of the Profession, and the answer is to truly understand what the important issues are and attend to them consistently in the right priority.

When I talk to practitioners from small firms in my seminars, workshops, and, in particular in Regional Law Society meetings, there is a constant refrain along the lines of the fact that it’s hard to get the balance right between looking after clients and running the firm.

Of course that’s unavoidably true, and is the root cause of most of the resulting problems, as Principals simply do not get the balance right often enough.

They have not done a proper analysis of what is truly important, including getting help from outside the practice, and thus not established suitable plans to attack the challenges in a focussed and consistent manner.

Cash flow issues are not fully understood, which is not surprising when they aren’t in much bigger firms all too often either!

Marketing isn’t given sufficient importance, leading to an absence of appropriate fee-paying work in the zone where Principals can finally make a proper profit for themselves above their proper salary. Barely keeping the doors open, and earning the equivalent of a poor salary, cannot be considered success, and makes it nigh on impossible to build a firm that is around for the long haul.

The statistics continue to show that returns for Principals in small firms are paltry indeed, and this has to sap confidence and reduce self-esteem, two vital ingredients in managing a law firm well.

Pricing is usually handled very badly, with erratic practices at best, and work is regularly conducted at fee levels that will not even cover expenses.

Throughput of work is not monitored carefully, and far too much focus is placed on short-term billings results and short-term cash flow ebbs and flows. There is not adequate attention to underlying production levels to protect profit margins and ensure cash flow is adequate, if credit control is commercial while remaining professional.

Engagement Management and Credit Control are often honoured in the breach, so an appearance of being busy camouflages the upcoming profit and cash flow problems.

Firms are generally under-capitalised, so shoestring strategies are operated when more investment, properly applied, is clearly needed. Because the fundamentals are usually so very wrong, these firms seldom trade into significantly better financial positions over time.

Above all, insufficient attention is given to personal time management, so appropriate time to gain the skill sets needed to address the key problems is perceived to not be available. Practitioners need to vigorously segment quality time for their different challenges, to assist in ensuring they at least do not drop the red balls, or know they have, and can pick them up quickly, when they do!

My observation is that most Law Societies are trying to address the issue of better practice management education of Principals of small firms, and have been for some time, but there isn’t yet much evidence of a lot of traction being obtained.

I also observe too much teaching that is not practical or grounded deeply in common sense, so basic skill sets that other lawyers successfully apply every day can be brought to bear by a much enlarged group.

What should be heartening for small firm Principals to hear is that if they get to grips with the real issues, and persistently address them, there is no systemic, inherent, reason why small practices cannot be profitable.

Indeed, in my first quarter century of consulting experience, involving 1223 small-medium firms, those with one or two principals, doing the right things pretty consistently, can be by far the most profitable firms in the whole Profession.

You do not need to be lucky, in the right place at the right time, or blessed with a practice full of ideal clients, to thoroughly enjoy a career in the Profession as a Principal.

Rob Knowsley LL.B MIMC

Principal Consultant…Knowsley Management Services (KMS)

1 May 2013