CROWE CLARK WHITEHILL
There is a sense of pessimism about the future of the legal profession. The downturn has hit the law hard, with many City firms making redundancies, and it has triggered much debate about the future of such fundamental things as the partnership model and the fees structure. Add the fact that the Legal Services Act comes into effect this year and the future is uncertain. The new act, sometimes called Tesco Law, will open the door for non-law firms such as supermarkets to provide legal services and may start to bite into more established firms.
Many in and outside the law have their pet theories about what needs to be done. But it is clear that before anything else can happen one simple change in focus is needed: law firms need to start behaving more like businesses. True, the very largest ones do, but many mid-sized firms are still stuck in the cosy past. With people seeking better and cheaper legal services, severe commercial pressures are being placed on firms’ business models. The future will be less forgiving.
Over the years, we have helped a number of law firms become more profitable, and we have learned that for meaningful change to happen they must address several issues. First, a firm needs to understand the risk/reward balance in its business model. A surprising number of partners are unclear about this. This is not just about taxes and expenses – a successful firm must look at the bigger picture, spot opportunities and take advantage of them.
Many risks can be removed without hurting competitiveness. For example, overheads and office costs, when they are large, can pose a risk to a company’s profitability and ultimately its survival. Bad debts are another pitfall for many firms. For example, we’ve seen several firms fail to bill promptly and chase clients that don’t pay within their terms of trade, putting themselves in real jeopardy. To tackle this, law firms should try putting more emphasis on individual partners’ cash collections and drawings – this will lead to more focus on profitability.
Secondly, law firms are often bad at planning. Firms can no longer afford to continue doing work just because they have done so in the past. That is just to ignore that the world is changing. So partners must identify what their firm does well and badly. Look at the needs of clients and potential clients, and think about ways to help them – it might not be what you have done for them in the past.
Then look at your people and evaluate what their strengths are and what new skills they may need to develop. In the current climate, for example, firms that do a lot of public sector work need to consider the impact of the public spending cuts: what work might you lose? Will some of your contacts be made redundant? Do your firm’s fee earners need training to help them develop a “private sector” approach? We can all understand that, but as the economy rebalances the private sector will face changes just as big that must be understood and dealt with.
Connected to planning is thinking about growth. Where is new business going to come from? The 80/20 rule says that 80 per cent of your profit will come from 20 per cent of your clients. Identify these 20 per cent and spend time investigating their business plans and strategies. One firm that we worked with made itself an integral part of its clients’ expansion plans, getting involved in restructuring, employment and property issues, even though it hadn’t previously advised on these areas. This involvement, together with an attractive fee structure, meant the firm was able to bring in a greater proportion of the client’s work.
Eliminating risk and scrutinising cash flow will bring not only reward in the form of profitability, but also security: security in finance, clients, people, succession, infrastructure and communication.
It might sound melodramatic, but now is the time to look to the future. New regulation, financial funding, changes in the professional indemnity rules and other changes might well combine to make law unprofitable for many mid-level practices. Law firms might often not behave like other businesses, but they can certainly go bust like them.
Roger Flaxman of Flaxman Partners Limited and Anthony Barling of Think Profit Ltd also contributed to this article