The relationship between profits and fair, reasonable and proportionate fees
Poor management of human resources at a time when flexible work has come to the fore is a key issue that hinders law firm profitability, but there are ways to ensure that fair fees and reasonable profits are mutually attainable, writes Rob Knowsley.
Most lawyers and practice managers understand their professional obligation to charge fair, reasonable and proportionate fees.
This obligation is quite fundamental to all, but it is documented and overseen from one jurisdiction to another across Australasia. Many of our readers will wish they could always charge fees that were fair and reasonable; to them as well as to the client!
Assuming a practice were able to charge fairly and reasonably to all in 100 per cent of its matters, it sadly would not of itself in any way guarantee reasonable profitability. Reasonable profitability is achieved by generating revenues that exceed expenses (including principals’ salaries) by a reasonable margin. To do that a firm needs to obtain, and carry out, a sufficient volume of work, charged at appropriate fees.
We can leave aside here difficulties created by timing differences between the incurring of expenses (and disbursements) and the collection of fees. Working capital management is one of the inherent joys of business for attention at another time.
Resources management an issue
The costs of operating a practice may well be one factor of many in assessing the fairness and reasonableness of fees in a particular matter, but the fact that a firm simply does not have enough work cannot be part of the equation.
People management has for a very long period of time been a key Achilles heel for legal practices and the challenges are only increasing and becoming more complex. Poor utilisation of resources has always been rife, but new issues are coming to the fore.
As today’s smaller practices continue to evolve, more and more we see employees involved in work scenarios that are flexible, and often not what may previously have been considered ‘fulltime’. ‘Fulltime’ work itself is morphing, downwards.
Few practices have been able to sufficiently adjust structures and strategies (and thus expenses) and keep resources properly utilised to fully underpin reasonable profitability. It is not at all difficult to think of 10 to 15 areas of practice expense that do not diminish simply because some team members are not office-based, five days a week, eight hours a day. There are plenty of firms with significant parts of their expensive premises that are not occupied at all (let alone 24/7), and revenue production in occupied space is often way below what is reasonably possible.
While the struggle to adjust expenses goes on, there is greater need than ever before to use those resources that can be worked on more efficiently, to lift revenues, and protect or rebuild reasonable profit margins.
Put simply, that means identifying the inputs that should be available; making sure enough work of the right type is available to match those resources; ensuring that the work is done efficiently and promptly, invoiced (fairly, reasonably and proportionately) promptly, and that the invoices are collected promptly.
Where we go wrong
The points at which so many firms go astray with this ostensibly simple business plan are:
1. Not having well-established, inherently fair, clear systems for establishing what inputs should be expected from each and every team member (and for getting genuine buy-in).
2. Not regularly reviewing progress in terms of available work, and actual inputs by all team members, both in regard to volume and quality (quality will usually have an impact both on fees and recoverability).
3. Not making it clear that a performance/remuneration review will involve very regular assessment and discussion of all KPIs that are fundamental to the ‘main game’ (looking after clients exceptionally in enough volume, and efficiently enough, that the firm can generate enough revenues and collect them promptly).
4. Not having straight-forward business development plans that are believed to be on sound grounds that are likely to produce enough of the right types of work if implemented properly and consistently).
5. Not monitoring the actual leads and lead conversions that result, and projected revenues (so as to be able to respond early to shortfalls and get back on track as quickly as reasonably possible).
6. Not developing sufficient skill in setting/communicating pricing, and value, to improve overall revenues on each piece of desirable work where that is possible.
It’s time to do your job
With proper planning and monitoring it is possible to have all hands always on the important levers, to see early where adjustment and increased activity is needed, and to identify the scope of the ‘crash’ in profitability projected if effective action is not taken promptly. This is the simple, very focused, responsibility of law firm management, whether by principals or non-principal managers or, usually, a combination of both.
From my observation, that it does not happen all that often is the root cause of a history of poor profitability in most smaller law firms in the past 50 years or so.
The good news is that, despite the profession being disrupted on an unprecedented scale, the answers are not difficult, and there is huge upside.
Optimists have good reason to be very optimistic, and pessimists have plenty of reason to work at reshaping themselves to participate fully in profitability improvements available in the exciting times ahead.
Rob Knowsley is the principal of Knowsley Management Services. He is a high-performance coach and facilitator with four decades of experience that has been dedicated to assisting law firms and their individual lawyers and managers as they seek to maximise their return on investment from reasonable inputs of time, money and other resources.