The End of the Financial Year - The Price We Pay!

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left As another financial year comes to an end (at least in Australia) many firms spend much time and energy in the month of June doing things such as:

  • Completing their staff performance reviews (“appraisals are just a form of sanctifying decisions already made”; trotting out the same standard list of Key Performance Indicators)
  • Negotiating staff salary reviews (usually CPI for “non fee earners”, some rule of thumb formula aligned to personal billings targets for “fee earners”)
  • Agonising over how much (if any) the market can stand for hourly rack rate* increases (mainly firms rely on reverse competition to set rack rates )
  • Publicising their internal promotions (well justified, even if promotions were made during the year; and at least can justify some rate increases if lawyers move up the ladder)
  • Finalising the new financial year’s budget (same age old formulas; use some 12 month old benchmarking data; negotiate potential revenue targets with partners; undertake a capacity revenue budget- and then discount for “realities”)
  • Scraping around trying to find cash (the annual debtors purge)
  • Writing off unbilled and unrecoverable WIP (the annual WIP purge)

* Of course “rack rates” are akin RRP for cars and whitegoods -no one really pays them except the ill informed or the very rich.

And to think, during June some of these firms even find time to service their clients!

Sound familiar?

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It should because nothing much has really changed for some of these firms in the last 20 or 30 years in this regard irrespective of a firms size and/or location as most firms stick to the same old business model and paradigm, focussing on revenue growth as their prime goal. And our revenue comes from utilising the leverage model we have come to rely on so much, represented essentially as:

Fee Earner x $ Rate x Hours = Revenue

We call these firms Firms Of the Past.

Whilst generalising of course, as I talk to and work with several firms over the last couple of months, from what I read in the legal press and from what I hear on the grapevine, many firms are budgeting for :

  • Increases in salaries and expenses (trying to keep modest maybe 5-8%),
  • Some increase in hourly rack rates if they can get away from it (modest 5% maybe),
  • Some revenue growth (modest to average)
  • Little increase in billable hours per se (as many firms still struggling to get their standard 5.5 - 6.5 hours daily targets as it is)
  • Some increase in profitability (from nil to modest)

Now some may ask, in a legal market where there is predicted to be little overall growth for 2011/12 and with an increasing number of law firms competing for the same work, how are  all firms going to increase both their market share and their profitability?

Whilst one has to query our obsession with market share; it does seem that unless the market will wear higher prices for the same work to be performed (and for many firms that must be questionable) some firms are just simply not going to reach their revenue targets.

In terms of profitability targets, in some firms it seems their potential revenue might only be maintaining pace with their expenses. These firms will have to increasingly rely on other factors for such profitability growth (such as lesser equity numbers, increase in margins) or suffer a stagnation or even a fall in profit.

Like any industry there will always be winners and losers, our profession is no exception. Some firms are going to excel over next year or two and others are going to be disappointed and I believe this will be the case in all “tiers” of our market.

Thank goodness there is a small but increasing number of firms that, whilst experiencing other challenges during June, do not experience all those that Firms Of The Past do- or at least not to the same extent.

They are firms made up of lawyers who are innovative and courageous people, who have become tired and disillusioned with old business models and see a competitive advantage in being different, realising there are much better ways of practicing law which benefit themselves, their staff and their clients all at the same time.

They focus on profitability and cash -not revenue.

They spend the month of June:

  • Not doing staff reviews:their staff reviews- if they have them at all- happen regularly during the year and are primarily based on Key Predictive Indicators- not Key Performance Indicators. (i.e. looking ahead not behind)
  • On agreeing remuneration and other employment terms based on these Key Predicative Indicators which might include accountabilities such as turnaround time, what their clients think of their performance, teamwork, innovative solutions, creativity, and contribution to profit- not on hours worked and billed.right
  • Not contemplating rate increases (these firms have prices- and rates are not prices).
  • Setting team budgets built around a range of targets including profitability (not personal exertion revenue targets).
  • Not undertaking debtor purges; they do not have the same cash issues because they agree their prices and terms of payment up front with their clients and are paid all or something in advance- not after the work is done. They know that customers who agree their prices up front and do not suffer any surprises pay faster and do not dispute bills after the work is done.
  • Not writing off WIP. They either do not record time so do not have WIP or if they do record time the WIP is largely irrelevant as it is the fee agreed that counts.
  • Working hard at continually providing incredible value to their clients; so they can charge prices that reflect the value the client perceives they are receiving- not the hours expended.

 

We call these firms Firms Of The Future.