I trust these few tips
flowing from my 25-plus years as a law firm management consultant will be of
assistance both for the late starters in Australia (your 2013-2014 Budget
should be all locked away by now), and for smaller law firm owners and managers
generally.
Right up front here’s
one critical decision you can make…
Budgeting for Expenses
is almost always the easy bit...delegate it!
Budgeting for the other
side ( I hesitate to say the "Dark Side') is far too often addressed in small law firms by looking at what has been
achieved in the past year and adding some percentage to that…bolder in good times
(although usually not nearly enough) and little or nothing in tougher times.
This approach lacks
vision and any real strategic quality, and generally locks firms in to another
year of relatively mediocre performance.
It’s a better approach
to get a real handle on what your true
productive capacity was and why you did or did not achieve it in the year
concluding.
My experience is that
most firms if they are honest will identify themselves as falling within these
parameters:
Didn’t have enough work…
Didn’t ever get file
velocity optimised and billing up to date…
Lost fee-producing staff,
and for whatever reason didn’t replace them…
Had plenty of work to
keep the team busy but far too often felt under pressure to keep fees below
what was really needed…a fair fee for the value delivered…
Often the reasons for a
shortfall between capacity and actual will be a combination of factors, but in most cases I find a shortage of work,
and that isn’t just in tough times.
It comes about because most small legal firms don’t place enough
emphasis on planned Marketing/Business Development.
This inevitably leads to
the periodic or continuous absence of what I have always called “A healthy
backlog” of client file work. It is therefore simply impossible for the current capacity
of the fee-earners, that is being fully invested in by the firm, to be
achieved, shaving huge slabs off the potential profit and undermining the whole
financial security of the firm.
It is made a lot worse
if the capacity of the fee-earners is not properly understood in the first
place, so that even those perceived by management (and themselves) to have a
healthy backlog of work really do not.
In that case the firm
has a cultural and systemic inability to generate the sorts of profit margins
that it is in fact capable of with it’s present structure and Expenses, and
being achieved by similar firms who are getting it right.
To fix this big problem, split the day of each
employee into KMSFirmTime and KMSClientTime, using common sense guidelines for
what amount of FirmTime should be appropriate for the skill sets of the
individual, and how you want them applied to your Business Plan.
You will in 99% of cases find that the actual
quality contribution of FirmTime across desired categories such as Marketing,
Supervision, CPD, Knowledge Management, IT, etc., is far less than you would
have imagined.
Unless
that can be fixed promptly to your complete satisfaction your best way forward
is to reduce the "ask" in FirmTime from the individual, and require
the individual to invest more of each day they are paid for in the Client legal
work they have been trained for.
In a
nutshell, by grossly over-estimating the need for FirmTime, by at least an hour
in the average day, and by not organising to provide enough client file work, most
small law firms ask for far too little from their fee-producing employees, and yet
ironically seldom even achieve that lowered goal. The survey statistics are consistently very clear on this.
On
the other hand, in firms with proper systems and cultures, much higher goals
are pretty consistently achieved.
What is it that you are budgeting for in a small
law firm?
Remember to be very clear
what it is that you are budgeting in any process.
Is it New Production for the period? The
creation of Raw Work In Progress.
Is it Billings for the
Period…Rendered Fees Invoices?
Is it Cash Collected for the period?
Of course it should be
all three!
A major failing in many small legal firms (both when budgeting and when assessing "performance") is in
placing far too much focus on fees rendered or fees collected.
The underlying production to current capacity,
to optimise future billings and cash, is actually infinitely more important.
New Production in each
period is of course the key to what you can ultimately bill and collect over
the long haul. So you must be planning that down to the level of individual within
team, using individual WorkPlans™.
In almost all work there
is a lag time between doing the work and billing it, and that varies
greatly…think Domestic Property and Medical Negligence as examples where the
time lag can differ by years! Retainer arrangements paid in advance are a nice
exception!
So while we would want
to budget New Production in Medical Negligence work, we can expect fees and
cash to flow throughout this planning period from work largely done in earlier
Financial Years…only the final stages will involve New Production from this
planning period. Agreed, these final stages often involve a frenetic flurry of
intense work!
On the flipside, work
done now, even at capacity or above, will in the main be billed, and fees collected,
hundreds of days down the track on average, and in many cases, especially with
today’s staff turnover rate often increasing, well after the fee-earner
initially involved has left the firm.
All these variables need
to be built into your three budgets.
Another twist of course
is whether your firm accounts on a Cash or Accruals basis. There are still
plenty of firms on a Cash basis, so much more often bills are not finally
prepared and entered to the firm’s systems until the cash is about to hit the tin,
so to speak!
Budgeting for fees
rendered and cash flow in long tail work is only able to be as good as your
systems for estimating when matters that have been running for a long time are
likely to be completed.
So the bottom line is…
budget for New Production, for Fees Rendered, and for Cash Collected.
Throughout the year run a
very good Cash Flow projection that as accurately as humanly possible reflects
all the flows in and out, and graphs the projected cash position relative to the limits
in your finance facilities, so you can see particular pressure points coming
well ahead and take the necessary action.
When cash is
particularly tight I recommend moving from a fortnightly or weekly Cash Flow
down to a daily one…with details altered daily there’s not as much to do to
keep it up to date as one might think!
By focussing your New
Production budget on the true capacity of your people you are:
Forced to
think more throughout the year about work availability and Marketing…and...
Much more
likely to get Revenue returns in due course from the key area of your capacity
that was previously producing little or nothing.
This area of oft-untapped
capacity I refer to as “The REAL Profit Zone”. It’s clearly the real potential
profit powerhouse of every firm, and having it doing absolutely nothing, either
because you haven’t recognised the capacity, or have done little about the
Marketing to take advantage of it, is an appalling waste that no good manager
should be prepared to continue to countenance.
It represents hundreds of
thousands of dollars a year per Principal in lost profit in most small firms (and in plenty
of bigger ones too as I have seen first-hand!).
