The financial results for 2016 are in and the story is somewhat mixed for small and mid-size firms but the message is clear – profitability needs constant attention and management. After spending countless hours with law firm leaders over the past 14 months, it is evident most law firm leaders need help establishing, implementing, and monitoring strategic initiatives for their firm, practice groups, and individual partners. Firms approach these issues in different ways depending on the culture of the firm and the philosophies of their leaders. It is the actions firms take today that will determine, not only their short-and long-term profitability, but also their future.
Following is part 2 of a two-part series specifically addressing the challenges facing small and mid-size firms.
EXPENSES
Small and mid-size firms generally do a good job controlling expenses. However, there are several areas that, if addressed, could reduce costs and improve efficiency. These areas include:
Staffing: Many, if not most, law firms are overstaffed. Several factors contribute to this problem. There is extreme loyalty to the support staff in small and mid-size firms. While this is an admirable trait it often leads to longevity of personnel who may not have the requisite skills to perform at the high-level firms need. Needless to say this may not be in the firm’s best interest if skills deteriorate over time. Many firms have processes and procedures that are labor intensive and time consuming. They require more staff than otherwise would be needed for efficient and up to date processes and there are no incentives in place for improvement. Often firms trim staff to reduce expenses. Over time firms replace those positions so staffing returns to the previous level or beyond. We recommend a thorough review including a strong evaluation process to ensure that the right people are in the right job and that realistic expectations are in place for all staff.
Technology: Technology costs can get out of hand very quickly, especially at small and mid-size firms. There is a strong reliance on outside vendors for technology advice but these vendors may not have the firm’s best interest as their first priority. Also, a vendor may not be available to help implement the technology to ensure that it creates efficiencies and the expected benefits are realized. Most law firms don’t have the internal personnel with the skills to manage the myriad of system choices in areas such as financial management, time and billing, practice management, marketing, and human resources. In addition, firms need a robust website and some are trying to go paperless. These goals are reasonable but require skills, management, and oversight. Most administrative personnel have daily responsibilities that are, alone, a full-time job. Expecting them to maintain a tight control of the technology may be unreasonable and usually leads to unexpected costs.
Marketing: Marketing and business development costs can grow quickly without much success unless they are managed and measured. In many small and mid-size firms these costs are not managed on a central basis and success is not determined or measured. Also, many of the costs captured in these categories are not related to the acquisition of new clients/matters or retention of existing clients such as sponsorships and seminar attendance. Marketing activities need to be part of the firm’s overall strategic plan so they are in direct proportion to the goals and objectives. Most partners need guidance and small and mid-size firms usually do not have strong leadership in this area. We recommend adding this talent on a part-time or retainer basis and the added expense should more than pay for itself in a reasonable period of time.
Executive Director/COO: The senior administrative role in small and mid-size firms is extremely important. The person must have diversified skills and the support of the partnership to succeed. This position is responsible for keeping the “trains running on time” which includes managing accounting, marketing, technology, human resources, facilities; and also respond in a timely manner to all partners wants, wishes, and needs. In addition, firm leadership expects and needs advice on strategic business issues. It is no wonder that this position turns over frequently and there is usually dissatisfaction on both sides. Recently, we are seeing firms utilize outside help to support the position through mentorship and provide objective business advice to firm leadership.
PROFITABILITY
Managing the profitability of a law firm is a primary responsibility of firm leaders. We have heard, often, that firms are not money motivated. We have not met one partner, when offered more money, turned it down. Also, the robust lateral market confirms it is full of partners looking for opportunities to increase their compensation.
All that being said, improving profitability does not happen by accident. Leaders must understand and manage the components of profitability. Areas such as billing rates, billable hours, realization, staffing, and expenses have to be monitored and managed on a consistent basis. Expectations need to be established and consequences for not meeting the stated goals and objectives need to occur. Improved profitability is a realistic goal ifthe leaders of the firm are willing and able to spend the necessary time and make the needed critical business decisions.
Conclusion
2016 results saw revenue increase at many small and mid-size firms due primarily to higher billing rates and the addition of laterals. That’s the good news. The bad news is that expenses in many cases grew faster than revenue so profitability was flat at best, and down in many cases.
Law firm leaders face many challenges but the profitability and future of the enterprise are the most critical. They need to understand the market, create a vision, and utilize business acumen to take sound business and financial actions. Decisions regarding the areas of law, the pricing of services, acquiring new business, retaining existing business, and internal operational efficiencies need to be made to promote that vision. Many times small and mid-size law firm leaders do not have the expertise to make these time consuming difficult decisions. Do not be afraid to ask for help.