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The critical interplay between people management, productivity and profitability
Poor profitability can plague law firms unless they address complementary factors relating to salaries, effective use of human resources and clarity around staff KPIs, writes Rob Knowsley.
Let us get the profit imperative out of the way right up front. Profit is very important for all businesses, including law firms. There is not enough scope in the length of this article to delve into the full range of reasons why.
Despite perceptions, accurate data is not available for profitability averages in the profession. Even the highest-quality surveys, with the greatest participation rates, are heavily skewed by the profile of the participant firms. Furthermore, my experience is that the average profits reflected for small-medium firms in surveys (despite being unimpressive) are well above the very poor profit levels of the very big majority of firms.
This short article looks at some key reasons for relatively poor profitability, and sets the scene for later articles examining such issues in more depth.
Factor in all overheads
The first dollar of genuine profitability can only be achieved once all overheads are covered, and that includes an actual or notional salary for owner-principals.
Views on what reasonable salaries are for fulltime owner-principals vary about as widely as the number of firms there are! However, it is important to recognise that lower salaries will push apparent profits up, and higher salaries will push apparent profits down.
For the purposes of this article, I will assume that average profitability in small-medium firms that do make genuine profits is about 15 per cent of revenues. As noted above, principals’ salaries are separate.
Too few managers in small-medium firms appear to fully understand that the numbers mean that firms have to be pretty effective in using their human resources, day in, day out, all year round, to achieve decent profitability.
This is more so the case than ever before, as employees in small-medium law firms are tending to invest fewer hours in the practice. So the relatively low number of available hours needs to be planned, and actually used, thoughtfully.
Merely setting fee targets is not enough. Team members need to fully understand how they are expected to use their time, what the KPIs are, what feedback they will get and how they will receive it, and how they will then have the opportunity to have a quality dialogue about that feedback.
Insist on quality conversations
These do not need to be ‘difficult’ conversations from which people shy away. It is basic human nature for most people to want to know what is expected of them and to want feedback on how they are perceived to be going. Meeting that fundamental need is actually very easy.
As a firm gets a little bigger, it is particularly important to ensure that the quality of the conversations about expectations and performance is as consistent as possible across the firm. It is not in the best interests of a team member or the firm for there to be inferior quality of feedback in these key communication areas because of the paucity of skills of a particular team leader.
The communication must be fully effective and relate absolutely to the KPIs of the individual working within the team.
Focus on effort
In my view, the focus of financial KPIs needs to be on investment in quality effort, rather than on fee outcomes. Invoicing for different types of work varies greatly in terms of timing, and, frankly, in some areas of work invoicing a particular matter is not possible while many of the team who worked on the matter are still with the firm! Substantial medical negligence matters are a good example.
Fortunately, as many clients are demanding a greater understanding of the work that goes into their matters, and the likely cost, firms are being driven inexorably towards better upfront scoping and ‘project management’. External pressures for full disclosure, upfront and ongoing, complement this trend.
Compare this evolution to the bad old days when many a matter wandered to a conclusion much later than necessary, with huge resources applied and often with poor direction and supervision. Invoicing usually bore very little relation to the resources absorbed.
Firms are now under much greater pressure to invest resources wisely in matters, to keep costs down and to try to create a reasonable profit for the available fee, whether agreed or prescribed.
Get your transaction volumes right
All the focus on running matters efficiently and effectively can divert attention from a related critical issue – that is, the team needs to run enough of such matters in that manner to generate the revenues necessary to create a genuine profit.
Put simply, a team running 15 domestic conveyancing matters a month brilliantly will be a total failure in terms of profitability if the break-even point was 20 such transactions! The desired revenues for a firm will be reached if each team functions effectively on the required number of transactions, and has priced them appropriately. It therefore follows that KPIs around matter volumes, effectiveness in using good systems, file velocity and pricing will need to be front and centre.
Volumes will be related to both market activity and firm positioning in the market through marketing initiatives and reputation.
Pricing is an area in which most practitioners in small-medium firms have a lot of upside for valuable learning. It is intended that we explore some of the key issues in more depth in future articles.
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.