In the past couple of months I have worked on two consulting engagements. These two firms, which were very similar in many ways, have helped illustrate to me why some firms fly and some flounder, particularly in the smaller end of the market.
The two firms
On a spreadsheet, the firms would look very similar – in terms of both revenue and number of partners particularly. They were both regional firms operating in buoyant economies. They were both the dominant, go-to firm for commercial work in each market. And both were around a two-hour drive from a capital city.
Even in many of the subjective measures they were similar. Partners at both firms liked and respected each other. Staff at both firms were content but not necessarily all with a highly-driven work ethic. By all reports clients were happy.
Here were the differences…
Firm number one
The first firm had been generating a reasonable profit for the past seven years. However, in dollar terms, the partners’ returns had pretty much flat-lined since 2010 – adjusted for inflation they were going backwards.
The partners were acutely aware of this and were all busy trying to correct the course. However, they were so focused on staying afloat on a month-by-month basis (which often meant grinding out the fees themselves) that none of the core problems were addressed.
The staffing structure of the firm was out of alignment. Practice groups and individuals had been bolted on without a leading partner and some solicitors had no line of reporting to the firm or management.
As well as this, the firm had disproportionately high ratios of support staff to fee earners. This had arisen for a number of reasons – full-time staff returning as part-timers, fee earners leaving the firm – but it was largely a tail wagging the dog scenario in terms of who had the clout in the firm.
It became evident that any measures to improve profitability were immediately undermined by certain behaviours or expense blowouts.
Firm number two
The second firm was a sharp contrast to the first. The strategy session was a little daunting as this firm was one of the most profitable regional practices I have been into. This high level of profitability wasn’t just a spike; they had steadily ratcheted up their profits over a 20-year period. Everything they did was gold standard.
Financial success for the second firm was not really a magic formula. What set them apart is that they actually did what they agreed to do. On the revenue side they were totally focused on capturing all their time, even if clients were being billed on an agreed-fee basis. Partners set the tone, with all billing in excess of 6.5 hours per day. Employed fee earners had a hard floor of 5.5 hours per day, with the subtle message that no one progresses by doing the bare minimum.
Leverage in the firm was fairly low, as they wanted to ensure that there was full utilization. Expense management was also a feature, particularly in regard to the support ratios which were the lowest I have seen in a firm with a ‘traditional’ structure. All fee earners were computer savvy, and the firm had invested a lot of time and money into precedents and workflows to cater for the low-support levels.
I should note that the people in the firm were all happy – they didn’t feel like they were being exploited. They were well paid and just got stuck into work when they were there. The amount of weekend work or late nights the lawyers put in was not excessive, but similar to what one would expect of any successful firm.
The tone of the strategic-planning retreat was for the new crop of partners to decide whether they wanted to continue with the culture and direction that had served the firm very well for the past two decades. Given the financial rewards, it was not surprising they did.
A standout for me occurred when, during a break, one of the partners retrieved a strategic-planning report from 1991 – he had found it in a recent office move. It was essentially a blueprint for success and was a list of around 50 agreed actions and behaviours that members of the firm would adopt.
The content of the report was as relevant today as it was 27 years ago – the differentiator is that the partners actually did what they said they were going to do. I am sure that over the years there were a few wobbles, but in essence as new partners came through the practice, they bought into this culture and way of practising.
What can your firm do?
Perhaps members of the two firms will recognize themselves here. I am not being critical of the first firm as it is probably representative of the majority of firms out there.
Ask yourself, if you found a strategy document from two, five or even 10 years ago, could you honestly say you stuck to the plan? This article is really about the attitude adopted by the second firm which, all things being equal, is in reach of all of us. It is just about deciding to be successful, and sticking to a plan.
About Sam Coupland
Sam Coupland is a director of FMRC and works predominantly with small partnerships. Sam is considered the foremost authority on law firm valuations and values more law firms than anyone else in Australia