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.
