profit

The R.U.L.E.S revisited

In August 2013 I posted ‘Is it time for law firms to break with the RULES when looking at profitability?‘ on my old blog platform Australian law firm business development. It is without doubt the most read post I’ve ever written. And, as the recent publicity around DLA Piper’s decision to make equity partners clock 7.5 hours a day of time (not necessarily billed) shows, it remains one of the least followed and understood.

So what is the “R.U.L.E.S” system – and, three years after I last posted on this: do we, once again, need to promote its demise?

The R.U.L.E.S.

Taken from Robert J Arndt’s relatively short (at 31 pages) 1988 publication ‘Identifying profits (or losses) in the law firm‘, the acronym R.U.L.E.S stands for:

  • Realization – of billing rates
  • Utilization – of attorneys
  • Leverage – of lawyers
  • Expense – control of (both the fixed and variable kind), and
  • Speed – of the firm’s billings and collections.

For more than two decades the R.U.L.E.S have been the foundation for law firms looking to mine their financial information beyond the mere top level question of: ‘Did the firm made any money this year?’. Indeed, it could be argued that they were the precursor to the Balanced Scorecard in that they help determine:

  • which lawyers and partners are making a profit,
  • which practice areas are making a profit,
  • which matters are more profitable than others, and
  • which clients are more profitable than others.

But, in today’s world the R.U.L.E.S are not without fault. For example,

  • Realization is generally accepted as being the amount collected (ie, in the bank) against the effort to produce (ie productivity); or, as Altman Weil defines it: “realization is fees collected divided by the standard value of the time worked“.

On an individual fee earner basis, what this means is that if you set your fee earner a standard billable hourly rack-rate of [say] $100, and they charge the client $90 per hour (after write-offs etc) for work done, and for which the client pays $85 per hour (after asking for a discount etc) for the work, then the realization rate is 85% [I note that some firms adopt the practice of looking at realization as being the amount paid against the amount billed (94.44% in this example) but this is not the methodology used in RULES].

On the other hand, if the same fee earner does a fixed fee job for $1,000 and it only takes them 5 hours to do the job (cost of $500), then the realized rate is $200%.

While this may have been a good indicator of individual lawyers’ profitability in the past, increasingly it isn’t – not least because clients see through this BS and will not pay for their lawyers on a fully rack-rated hourly basis.

  • Utilization is the yardstick by which we determine how busy fee earners are. To determine this we look at the annual budget of hours the firm has set each relevant fee earner against the amount of billable time they have put on their time-sheets (daily, weekly, monthly or annually).

As I mentioned in 2013 – and nothing has changed – there are two principal flaws with this use of utilization:

  • the first, as shown by the likes of Crowell & Moring and others, is that the annual billable hour figure is a moving goal post.
  • the second, and more important, reason is that utilization sees an hour billed as “king” – it trumps all.

Today, where clients are looking for, among other things, an understanding of their business (non-billable hours spent attending industry events) and corporate social responsibility, utilization seems an outdated profit related performance metric.

  • Leverage is the number of fee earners you have to partners.

A reading of Maister’s Managing the Professional Service Firm will tell you, leverage is a key component of a law firm’s profitability. In order for a law firm to be more profitable, the maximum amount of work possible must be pushed down the chain to the more junior ranking lawyers.

Unfortunately, today this cannot be done so easily. Clients are simply not willing to pay for you to train your junior fee earners!

  • Expenses are both fixed (ie rent) and variable (ie salaries and bonuses) and are always going to be an important factor in determining a law firm’s profitability.
  • Speed of collection is generally determined as being the time from when you did the work to the time you are paid for that work.

Sometimes known as “lock-up” days, speed of collection will have a massive effect on the firm’s profitability.

Having bagged the R.U.L.E.S – again, the question remains: ‘What are the alternatives?’ The answer to that is that there are probably far more now than there were three years ago, but they are start from the same place:

(a) Do you have a satisfied client, and (b) Do you understand the value you bring to that relationship?

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Does your firm need a Head of Growth?

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I was away in the delightful Nelson Bay last week and so missed the opportunity to join the webinar co-presented by  John Grimley (@JohnGrimley) and Ivan Rasic (@Ivan_Rasic) on the issue of ‘Supercharge Your Law Firm Revenue With NewLaw And Big4 Sales Methods‘. Fortunately a recording of the webinar was made and you can now listen to this on YouTube (approximately one hour long, including the no-holds-barred Q+A session).

Anyhow, listening to John and Ivan’s webinar reminded me of a post on the Harvard Business Review website last month (February 19) titled ‘Every Company Needs a Growth Manager‘. In the post, the authors Jeff Bussgang and Nadav Benbarak set out very compelling reasons why every company (and not just Silicon Valley Tech companies) should have a growth manager or Head of Growth, many of which apply equally to professional services firms and so prompted this post.

Borrowing from Bussgang and Benbarak, the job description (JD) for the Head of Growth role at a law firm would likely say:

Oversight of client acquisition, activation, retention and cross-selling; working cross-functionally across the firm with Marketing & Business Development, IT, HR, Finance and Knowledge/Precedents to design, implement and execute on profitable growth initiatives within the business.

Although a number – if not all – of these functions are already happening with initiatives such as Key Account Management, Business Development, etc. I believe it is fair to say that it would be rare for these to be centralised under any one person’s control.

More to the point, many firms would benefit from giving an individual or team (depending on size) oversight to monitoring the right data and behaviours to ensure these key initiatives move forward without roadblocks. In turn, this should hopefully install a profitable growth mentality (aka, “profit principal”) within the firm as a whole (rather than the more traditional approach of having “star” teams).

It goes without saying that underlying all of this needs to be a well defined firm-wide strategic plan, which includes clearly defined growth objectives/targets. In addition, any firm looking to implement such a role/scheme would need to have a robust and honest client feedback program in place, as client insight needs to underpin any growth program.

Finally, the Head of Growth would need to work very closely with the Knowledge / Library team to implement a state of the art competitor intelligence analysis program – after all, it helps to know what’s going on in the market if you want to grow!

Ultimately, your Head of Growth would have the creative, analytical and strategic skills to work closely with the firm’s partners and leadership to get a clear understanding of your clients’ and target clients’ needs with the direct authority to implement a program or set of initiatives to target these needs and profitably grow your firm.

To sum up, although it would be a little unfair to say that, historically, professional services firms have not seen a need to grow their book of business – regardless of whether that was profitably or otherwise –  today’s highly competitive market certainly warrants your firm employing a Head of Growth position who is charged with oversight on growing the revenue and top-line profit of your firm.

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Are the legal press letting the importance of revenue get in the way of a good story?

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An interesting news item appeared on the Global Legal Post website overnight (Australian time). Citing a recently published (January 2015)  Legal Services Market Research Report by IBIS World, the Global Legal Post item, which is titled “Australian firms on the hunt for increased revenues” states that:

Pressure on revenues is forcing Australian firms to look overseas in a bid to increase turnover.

First of all, if I’m allowed to say, this is irony in action!

Given the number of international (mostly British) law firms that have entered the Australian legal market in the past five or so years as a result of perceived or real limitations on growth in their own domestic markets, to now be informed that one of the consequence of this action is that Australian firms now need to look overseas to grow their own revenue is, well, ironic.

More importantly – aside from being wrong as the IBIS Report clearly states that the market in Australia is growing (if admittedly at a snail’s pace) – is that it misses a crucial point; namely, increasing turnover for turnover’s sake is nothing short of a wasted effort!

But don’t take my word for it, as the prominent industry strategist and pricing expert Richard Burcher rightly points out in his comment to the link I posted to this on LinkedIn last night:

Surely it is bottom line growth that matters? And the assumption that this can only be achieved through top line growth is profoundly flawed. The application of a more sophisticated firm-wide approach to pricing can yield a demonstrable increase in revenue by on average 5% to 8%. For most firms that produces a profitability increase of 15% to 25% with the same clients and the same work. No wonder more than 50% of post merger firms report that it failed to deliver to the bottom line.

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Precisely Richard.

Unfortunately, however, this is not the only example of this type of legal press reporting/thinking.

Only the same day (Monday) The Australasian Lawyer reported – citing (wrongly in my opinion) another UK website – that the Australian arm of DLA had been “fingered for [the] law firm’s drop in revenue” as if huge levels of shame needs to be attached to this [revenue drop] given that it

follow[ed] a transition period where underperforming partners in the region [Asia] departed.

Well I happen to know a number of the partners who left DLA last year and one thing I can say with absolutely certainty is that they were anything but underperforming. More accurately, what they were was in practices that were no longer strategically aligned to where DLA sees the future of its business (something I think is made clearer in the UK version of this news). And, in a partnership sense, there is nothing wrong with having conversations like that. Indeed, they are to be encouraged.

So as with the discussion around revenue and profit, the discussions around revenue and strategy, while related are two different issues.

And all of this before we even get into the very real discussion of whether or not one law firm’s growth has to come at the cost of another law firm.

#BizDevTip: The only KPI that matters is client satisfaction

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Whether you are a newly admitted lawyer or an old-hand, in an industry that revolves around a 12-month cycle the one thing that you can be sure of is that you’ll be subject to a lot of internal and external reporting metrics.

These might be the service standards imposed by clients, such as the need to respond to phone calls or emails within a certain number of hours. Or they could be driven by the firm you work for, such as meeting an annual revenue budget. More than likely, they’ll be a combination of both.

And the metrics may even change over time, to determine whether you are being efficient or effective.

But the one thing you can be absolutely certain of is that the only key performance indicator (KPI) that has any meaning whatsoever is whether or not your client is satisfied with the job you are doing.

Sure you need to worry about revenue. You even need to worry about profitability. Pro bono and corporate social responsibility (CSR) are important. But none of this matters a darn if your clients aren’t satisfied.

Which is why it is absolutely astonishing that as much as:

 “94% of global law firms clients were not asked for any formal feedback from their primary law firm”

–  Acritas Sharpelegal2013

By all means, keep big data. Even mine the information and undertake data analysis. Do whatever it is you need to do to keep your law firm running.

But remember, giving your client the opportunity to provide you with formal, and impartial, feedback on your performance is one of the very few real differentiators left.

And if you are one of the 6% of global firms that are doing this, then there is every chance your firm really is one of the few that is standing out from the crowd.

And if not, you’re really only providing an easily commoditized service.

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Let’s talk about your law firm’s “collegiate culture”

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Collegiate“:

‘consisting of several colleges or parts’

very formal: ‘sharing ideas and responsibilities with the people you work with, in a friendly way’

– Source: Macmillan Dictionary

Business development professionals, like myself, often talk about the need for businesses to have a “collegiate” culture if the business is to have any real chance of turning a profit. Obviously when we talk about “collegiate” here what we mean is:

“the sharing of ideas and responsibilities with the people you work with in a friendly way”

rather than:

“consisting of several colleges or parts”.

But for business development professionals who operate in the professional services space, the thought of a firm actually having or  implementing a “collegiate culture” is more along the lines of a ‘nice to have’, than a reality.

There are lots of reasons why this is so, and to be fair most of them have more to do with the benefits and rewards system that breeds behaviour in law firms than a lack of willingness on the part of any firm to implement this type of culture.

And so it was with great delight that I read earlier this week the CEO of Shoosmiths (Claire Rowe) saying that a collegiate culture was how to keep staff happy and turn a profit.

Imagine, the nirvana of happy staff and making a profit.

Actually, where:

“We have a transparent and open environment, there are no secrets. We have very honest conversations with our people to set our plans. Our staff enjoy a set-up which means they can achieve their personal objectives in a supportive way”

it really isn’t that hard to imagine.

It also shouldn’t be that difficult to implement such an environment.

So it was with equal disappointment that I read the following day, on the same website, how DWF were to “take account of non-billable work in [their] new appraisal model” (my bold for emphasis).

I’m not sure if the management/HR team at DWF are aware quite how polar opposite their publicly stated approach is to that of Shoosmiths. And to be fair to the management of DWF, they may not have been aware when talking to the publisher of the website that the Shoosmiths story was going to be published the day before.

Regardless, the message to young lawyers is clear: At Shoosmiths we believe in transparent and open environment with personal respect; whereas at DWF if you are not billing, we will give you credit for whatever it is you have done, but we are not overly happy about the whole situation!

And it is worth noting that, from an #Auslaw perspective, it is not only the young lawyers who get this message. As far back as September 2010, Bob Santamaria – ANZ Bank General Counsel – stated in the Australian newspaper that:

“Law firms now are being run more as businesses and for profit, and that is affecting lawyers, good and bad”

going on to say:

 “There will be very, very good lawyers who are jaundiced by some of that approach that is applying in the big firms.”

In other words, if you can get the foundations of your culture right – and preferably making this a collegiate culture – you are some way to attracting some of the best talent around and, hopefully by extension, some of the best clients.

I happen to agree with Bob Santamaria. Indeed, I will go one step further:

If you can get a collegiate culture going in your firm that has values aligned with those of your client, you will almost certainly be as happy and profitable as Shoosmiths.

So how collegiate is the culture in your law firm?

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ps – if you are interested in what a firm’s values might look if they were selected by their client, Cordell Parvin’s “If Your Clients Could Choose Your Law Firm’s Vision and Core Values” is a good starting point

5 steps to take when your client becomes your biggest competitor

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One of the more interesting take-outs from an article (‘The Rise of in-house counsel: What does this mean for law firms?‘) published on the Australasian Lawyer website today – on the rise of in-house counsel numbers in #Auslaw – is the following comment by Katherine Sampson – managing director of Mahlab Recruitment:

“It’s not necessarily that they’re [in-house] going to a competitor firm, but they are going in house…”

To me this statement rings alarm bells and reads:

“your client has just become your biggest competitor!”

So, what steps should you be taking when your client has also just become your biggest competitor for that work?

Here are 5 things you should be putting in place immediately:

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Leverage and the 10-20-30-40 Rule

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Today’s Australian Financial Review Legal Affairs section has an interested article – ‘Junior lawyers bring in the money‘ – reporting what we all already essentially know: that law firms make their money from their junior lawyers.

What spiked my interest in the article was despite reporting the fact that “the conventional profit-driven pyramid model is still the dominant method adopted by most of Australia’s top-tier law firms” the percentages where the work is done has changed over time.

Early in my career we followed what was known as the 10-20-30-40 Rule, whereby [roughly]:

  • 10% of a matter’s work was done at partner level,
  • 20% of a matter’s work was done at senior associate level (there was no special counsel level in those days, but they would be included today),
  • 30% of a matter’s work was done at associate and senior lawyer level (in times when there was a difference between an ‘associate’ and ‘lawyer’), and
  • 40% of a matter’s work was done by the junior lawyers / trainees / graduates / paralegals (i.e., everyone else).

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