A blueprint for the new year and beyond

Sitting down with partners or a trusted advisor to devise a five-year strategy for your law firm is an essential but often overlooked process, writes Neil Oakes.

The year 2014 has been a challenging one for many firms. Depending on whom you believe, 2015 is shaping up to be more of the same. Small firms (and many larger ones) are being challenged by service commoditisation, increasing insourcing of legal services and rising costs. Having said that, some firms are booming and are busier than they have ever been.

FMRC has observed over many years that the better-performing firms are usually those that have these features:
• a well thought-out strategy; they know what they want to be and what they do not want to be
• a leverage structure with a balance between relatively junior solicitors and senior solicitors; not all one or the other
• an understanding by all fee earners of ‘minimum acceptable contribution’
• a clear pricing strategy, regardless of methodology (fixed fees, hourly rates, scale, perceived value or whatever), with the best performers keeping all of these possibilities in their tool kit
• an understanding of the cost of production
• a management structure with clear objectives and the support of partners
• leadership as well as management
• good financial housekeeping (price, WIP and debtor management).

Planning imperative
None of this is all that surprising. Many firms fail to implement strategies that they know will benefit their business. Some even go as far as finding someone else to blame for this failure to implement. In my experience, the best self-help first step in the practice improvement process is planning. I am not talking about a multi-volume document brimming with colourful flow charts, management clichés and motherhood statements. On the contrary, I am talking about a discussion that results in a one-page summary that tells every partner (or sole practitioner) where they are headed. The plan will guide those who have been delegated the responsibility of implementing it. I recommend a discussion around the following decisions. Meet as a partnership (or with a key advisor if you are in sole practice) away from the firm, somewhere where partners will not be distracted by staff or clients. Give each item full and frank consideration.

…………………………	This year	+1	+2	+3	+4	+5
What type of work
Partner numbers
Gross fees
Net profit per partner
Employed fee earners
Support staff
Space (sq m)
IT commitments

What type of work – refers to the type of services the firm is seeking to offer. In considering this, look at those services that you offer now. Consider what you would like to stop doing or stop doing within five years. Having done this, consider what you do wish to be doing and add these offerings to the ones that you want to keep.
Partner numbers – refers to the number of equity partners. You may wish to include salaried partners here, but I usually put them into the employed fee-earner section.
Gross fees – refers to the total fee billings of the practice (excluding disbursements).
Net profit per partner – refers to the desired profit per partner. When you are considering desired profit, remember that as a principal you should receive a reasonable pay for your time and effort and a reasonable profit.
Employed fee earners – refers to the number of employed solicitors, associates, non-equity partners and paralegals (full time equivalent so someone may be 0.5 ‘paralegal’ and 0.5 ‘support’).
Support staff – refers to all support staff in full-time equivalents.
Space (sq m) – refers to the office space required. The average Australian firm uses about 25sq m per person (including public space such as reception and meeting rooms). This is not ideal, though. I suggest that you allow for about 18sq m a person. We are told that best-practice space utilisation is about 7sq m a person, but this requires significant cultural and operational change.
IT commitments – refers to any foreseen expenditure on technology such as (practice management software) PMS, litigation support, marketing database etc.

The best way to approach these discussions is to fill out the actual numbers for this year and then do year +5 first. Come back and do year +1 next then simply ‘join the dots’. It is useful to prepare for these discussions by completing a comparative financial analysis* which allows you to compare your firm with similar firms. This will provide you with an understanding of what others (including the best-performing firms of your size) are doing.

You will find the comparative analysis exercise useful in determining staffing levels, fees per lawyer, fees per partner, possible profit levels and likely expenses. It will give you comparative figures and a profit improvement report. The next step is where many stumble, but the best do not – that is the ‘do it’ bit!

Neil Oakes is the director of FMRC, which has provided research, training and management advice to law firms throughout Australasia for the past 30 years.
www.fmrc.com.au

* To conduct a comparative financial analysis, visit www.legalbenchmarking.com.au. This site enables you to enter your data securely.