Transform the Profitability of your Law Practice

A guest blog by Allan Carton, CEO of Inpractice.

KPI Dashboards can enable you to focus on transforming the profitability of your practice, providing access to live, meaningful financial information you can see, share, talk about … and ACT on! Through better financial management – and without generating any new business at all – you can readily:

  1. 1.       Reduce your overdraft.
  2. 2.       Generate extra cash and profit.

But you need some objectives to work towards and to monitor your progress against – so here are some hard numbers to get your teeth into.  Do these returns justify an investment that equates to a few chargeable units per month per fee earner to get these systems running in your practice? Take a 40 lawyer practice.  With a modicum of effort, focusing on finances, you can:

  • Reduce the overdraft by £675,000 over 3 years.
  • Generate extra cash and profit of £175,000.
  • Release £700,000 against an overdraft
Productivity (Utilisation)Take, for example – 40 fee earners charging 1,000 hours each.

  • Suppose each charges just one more hour per week which is billed at the average £125 across 45 weeks.
  • Creates extra £225,000 income, profit and cash.
  • Net profit from 25% to over 28%.

Reduces overdraft by £675,000 over 3 years.

ExpenditureYou probably already have significant fixed costs, so in the short term – attack the variables.

  • Assume £1.75m of £3.75m costs are fixed in short to medium term
  • Reduce remainder by 3% each year over 3 years – not too radical

Extra cash and profit of £175,000.

Work in ProgressAim to reduce WIP balances by only 5% over 3 year period

  • Examine procedures for moving work through quickly
  • Use terms of business aimed at billing WIP at the earliest opportunity.

This could release £200,000 against your overdraft.

DebtorsAim to reduce debtor period to 2 months in three years.

  • Agree billing period with clients – monthly if possible.
  • Communicate overruns before sending a bill.
  • Set standard collection procedures which partners cannot easily override.

This could release £500,000 against your overdraft.

Disbursements
  • Paid disbursements are the issue.
  • Adopt “Zero tolerance” on unfunded disbursements where possible.
  • Ensure processes are followed in areas (such as Personal Injury and Litigation) where some funding is possible.

To achieve this you need firm-wide engagement, to monitor performance and work together on a daily basis to keep up the momentum and stay on track … but that’s what this is all about.   Why should KPI Dashboards be top of your list now, how you can make it work for you and what are the next steps you can take to make this work for you? With many law firms now engaged in “business transformation” (whether you use this terminology or not) there is a need for your people to know how the plan to transform the business translates into what is required of them. It is the job of management in law firms to make financial management meaningful and a pressing priority; and to equip lawyers to help themselves to improve their financial performance. Setting, communicating and evaluating performance against agreed objectives in terms that people understand is essential to build in the persistence that is needed to carry initiatives through all the way. A strong management team recognises that very few initiatives go 100% to plan. Persistence is a key factor in maintaining – never mind developing – a successful legal practice today.  Recognition of how far you have travelled and how far remains, requires communication around agreed measures of performance to evaluate, recognise and reward progress; whatever size or type of practice you are. Exceptionally good managers have established the understanding that regular review is needed to bring every element of managing the practice back on track … constantly. If you don’t know how far off track you have strayed, how can you know the effort needed to get back on track again even when (inevitably) things don’t go to plan.

  • If performance is on target in areas agreed as the right indicators, that’s good.  There is no need to waste time digging deeper.
  • When performance is over or below target – you need to do something.

  Achieve these levels of improvement … even without winning new business? Too many law firms are struggling to produce enough profit, focusing only on efforts to do the current work in hand or to generate new business; both essential of course,  but the quickest way to increase drawings and profits is through more effective management of the business that the firm already has easily within their grasp. This isn’t rocket science.  Get your approach to sound and disciplined financial management right now to produce immediate benefits, but you will benefit year on year as your business grows. Beyond those immediate benefits … these tools enable you to tackle other issues that inhibit development.  For example:

  • We work with banks that are constantly frustrated by the poor quality of management information they get each month from their customers, as the picture is not clear, so they struggle to be able to help their customers take the right steps.
  • Your people (finance and lawyers) are very often frustrated by the poor quality of financial information they can extract in a meaningful format from their old (and still even from a good number of still very new) practice management systems.  Lawyers struggle to readily “see the wood from the trees” with too many meaningless numbers on too many pieces of paper that tend to be ignored.
  • Fixed price agreements for legal fees –substantially on the increase – are impossible to fix with any confidence that you can handle the work at a decent profit unless you have reliable historic time and resource information on which to base your price / cost decisions.
  • It’s very difficult to drive improvements in internal productivity and performance unless you have some measures to work with today and – by comparison – tomorrow, when you want to constantly improve efficiency.
  • You can accelerate payment by getting bills out earlier in the month, rather than leaving most to the end of the month, but that generally requires some prompting
  • Too many people in the accounts team are being tied up in too many firms in manual manipulate of data to produce routine monthly reports.  Their time would generally be better spent in working with fee earners to act on the reports, not just write them.
  • That time should be spent with fee earners, helping them to understand and address what they can do to improve finances on their work from the point of instructions when they should agree fees and a payment profile … through to recovery of their time, their fees and disbursements.

  What You Need Now?It can be very difficult to implement the transformation now needed in a law firm.  Lawyers are usually more interested day-to-day in doing the work for clients rather than making sure the money is getting into the bank as soon as possible; at least until it’s time to take the money out.  Even in a practice where partners may not feel they need to earn more, there is a duty on the senior management team to maximise profits to support future investment and to reward the younger people coming through, who may be more demanding and less comfortable Readily available, current, meaningful management information in areas that matter will enable you to:

  • Actively nurture acceptance of clear financial objectives and targets in key areas of the business; overall and by department, where there will be variations to reflect the reality of different types of work, client base and sources of funding.
  • Make better informed decisions based on the right information, clearly presented; your people can focus time on considering the facts, rather than gathering them.
  • Overcome traditional limitations on your technology that should not be allowed to inhibit your aim of sharing information with your people when you want to enable them to engage more in developing the business.
  • Promote clear communication and informed participation in establishing these objectives and targets from the people leading the teams, with full accountability for the performance of their team, both in relation to revenue and costs – alongside business plans.  Traditionally there has been a vacuum as feedback to lawyers has been difficult to fathom.
  • Focus minds and ACTION, with informed agreement on targets, which should reflect management roles and level of experience; also what are acceptable / unacceptable variances, which should all be very specific in key areas such as, for example: Fees, Time, Outstanding bills – by reference to days relative to fees, Outstanding disbursements – by reference to days relative to fees, Work in Progress – by reference to days relative to fees, % recovery of chargeable time recorded, % recovery of bills submitted, Actual hourly rate recovered (whether at hourly rate or on fixed fees)

However, the variance in what is appropriate in each of these areas on different parts of your practice adds complications in managing and presenting data that practice management systems struggle to deliver on. For example, you might find that “lock-up” targets (calculated automatically in £ by reference to the number of days you anticipate that it might take to recover payment) might be made up of the following factors for each department, referencing back to relevant time, bill and disbursement figures from previous periods:

Component of Lock Up (No of Days)

NoDepartment / Worktype

WIP

O/S Fees

Disb’ts

1Residential Conveyancing

0

15

60

2Company/Commercial

60

30

60

3Private Client

90

30

90

4Employment

30

30

30

5Family

45

45

45

6Litigation

60

30

60

7Personal Injury

360

0

360

8Commercial Property

60

30

60

Information showing where each lawyer, team, department, office and the practice overall stands against these objectives at any time, means that time can then be found to both tackle any failings and recognise good performance as a matter of routine. You therefore need a mechanism in place to enable regular and timely review of key financial performance information, enabling managers and fee earners to focus time on addressing just the issues (already agreed as “key” measures that matter), which require action; not the minutiae of numbers for every person in every team, when they are doing what has been asked of them.   This approach enables you to identify and dig deeper for:

  • Under-performers, to identify, interpret and discuss issues with them to move them closer to the targets that are agreed as the key areas where the practice must perform to be successful;
  • Over-performers, to identify, interpret and discuss what has enabled them to over-achieve, so lessons can be learned passes on to others and they can be given the recognition they deserve.  Information made available here is just as critical to the success of the practice (provided it is evaluated effectively) as with under-achievers.  Perhaps more so as you aim to develop your business.

You want to make sure that:

  • There are no excuses for under-performers not knowing exactly how they are faring – any time of the day, week or month – without having to go hunting for information they don’t want to find.
  • The over-performers don’t want to have to push either to get their managers and colleagues to recognise and reward their achievements. Keeping them on board has been identified as a major challenge by HR teams in our research with law firms who are members of the Greater Manchester Chamber of Commerce Legal Sector, which we manage.

To achieve this you want:

  • Clear, agreed financial targets in all business plans, shared widely
  • Readily accessible management information in the formats you want (building in calculations your accounts team may add manually now) available automatically “on screen” or at the click of a mouse, if that’s too prominent.
  • Data that directly correlates to your agreed targets, comparing targets and actual performance in a meaningful way. For example:
    • Fees
    • Time
    • Outstanding bills – by reference to days relative to fees
    • Outstanding disbursements – by reference to days relative to fees
    • Work in Progress – by reference to days relative to fees
    • % recovery of chargeable time recorded
    • % recovery of bills submitted
    • Actual hourly rate recovered (whether at hourly rate or on fixed fees)
    • The option to define access for different levelsof people in the practice in whatever way you want to provide meaningful information of real interest for:
      • The senior management team
      • Equity partners / business owners
      • Salaried partners, Heads of Departments, The Management support team
      • Lawyers
      • Support staff etc.
      • Easy / instant consolidation or segmenting of data at the click of a mouse for: fee earners, teams/departments/disciplines, offices, the practice overall etc.
      • Reliable historic data for previous periods, stored, but immediately accessible for future reference.
      • In a format your people understandincorporating their targets
      • Focus on just the key measures when they fall outside agreed acceptable variances
      • Facilities to dive deeper at the click of a mouse, when more detail is needed
      • Real time information, updated at least daily
      • Regular review, at times when you can prompt action that makes a difference this period, not next.

Conclusion You can be reasonably sure that improving access to meaningful data will improve your business performance if it is implemented and adopted effectively … with persistence to get it working and your people using it in the way you want.

Allan-Carton-th_21

This guest blog post was written by Allan Carton, CEO of Inpractice.

Law Firm Practice Management System and Business Intelligence expert. Managing Director of Katchr.

If you’d like to discuss how large or small law firm software and legal financial reporting systems could help you run your practice more profitably, please give me a call on 0845 6806 843.