Introduction
The legal sector has been facing change for a number of years. Consumers are more demanding, technology and the internet are changing the competitive landscape and the regularity environment is challenging. If a firm relies on legal aid funding or personal injury work then margins have been cut to the bone. More change is on its way and many firms are facing financial challenges.
Can failing law firms be turned around? The answer to this question is….yes. Here are the stages of what makes a successful Law firm turn-around.
There is usually a trigger for the management team of a firm to realise the extent of the problems and to then take action. When a Law Firm enters financial distress its bankers often introduce a turnaround professional or restructuring team.
Typically the team performs an initial analysis of the causes of the difficulties and assesses whether the business can be turned around or whether it needs to immediately either be dismantled or sold, or enter some form of insolvency process.
A classic turnaround project normally has three distinct phases:
Phase 1: The creation of financial stability.
Phase 2: The improvement of profitability.
Phase 3: The completion of the project’s objective.
Phase 1: The creation of Financial Stability.
There are certain key areas to focus on:
The firm needs to be run as a Business.
Through my experience in providing management consultancy and turnaround expertise to solicitors practices as well as being a solicitor and former managing partner, I am still amazed at how many firms fail to manage themselves in accordance with basic business and finance principles. This inevitably leads to reduced profitability, and in some cases trading losses which in turn can lead to a slide into insolvency if not arrested soon enough.
Many law firm partners fail to identify the early warning signs (or choose to ignore them) hoping that matters will correct themselves of their own volition. There is often the belief that there will always be more time to act. Regrettably this has led to many firms simply running out of time.
The reality is that the Legal Profession has evolved with the encouragement of legislative change to become a complex business sector combining professionalism with commerciality and consumerism.
To ensure firms can meet the challenges brought about by the changes, they need to professionalise the business management of their practices. Dedicated business managers can help with this – a firm simply will not be able to continue to maintain their professional independence and serve their clients unless they are commercially viable.
Business Planning.
Most law firms that fail do so because they do not construct a realistic and comprehensive business plan that is backed by sensible budgets and cash flow forecasts.
By failing to forecast they only realise that they are in trouble after money ceases to come in the door. As often as not the seeds of these problems are created months or even years before either through the failure to plan and make decisions or by acting on ill-conceived plans.
Of course you cannot plan for every eventuality and in a sector that is moving as fast as the law plans can easily become out of date quickly. That is why I strongly believe in reviewing the financial management information in depth quarterly to ensure that matters are progressing in accordance with the plan. If not action must be taken, decisions made and change effected, which may even be a change in strategy and a re-writing of the plan. Businesses of all sorts very often find it difficult to prepare plans and scrutinise their own performance and it is here that external consultants can genuinely add value – by the provision of the technical skills needed to prepare a plan and by testing and challenging the underlying assumptions and strategic objectives.
Managing Cash-flow
In reality you can only improve cash flow in one of two ways, either reduce spending or improving cash collection. There is a third which is the sale of surplus assets but few law firms are in the position of having excess assets.
In practice most law firms either operate or have evolved through a traditional partnership model. This tends to lead to firms distributing profits too soon leaving them under-capitalised. This is a sensitive issue: but it must be addressed.
In every turnaround situation I have been involved in the process always starts with a major “austerity exercise”, a round of cost cutting which invariably reduces the number of non-mission critical staff and reduces overhead costs. Without exception, at the end of the process partners question why they did not do this years before. It is astonishing how much none essential spend law firms carry whilst at the same time their cash flow forecasts indicate that they are not generating enough cash to pay next month’s salary bill, the quarterly VAT or PAYE.
Most law firms have a phenomenal amount of asset locked into their Work in Progress. This is worse in firms that undertake contingent work such as Personal Injury Claims. For example firms may not get paid for up to five years on complex clinical negligence cases. The key is to manage debtor days ruthlessly and not to over trade by gorging on too much contingent work. If contingent work is your mainstay as it is for many personal injury firms then you must manage the churn cycle effectively. If you leave this to the responsibility of the fee earner you will do so at your peril.
Phase 2: The improvement of profitability
Cutting costs is easy: driving growth is more difficult
In the current legal landscape it is difficult for law firms to increase their turnover and improve their profitability: but it can be done.
There is no point formulating a business development strategy (Battle Plan) without an understanding of the competition (Enemy) and the factors affecting the profession (a Battlefield Appreciation). The plan must be realistic based upon an assessment of your capability.
So what does the battlefield look like?
There are certain key drivers for change in consumer legal services at present
The national economic business environment.
How much clients are prepared to pay for legal services and how they want those services delivered.
Technological and process innovation.
New entrants and types of competition in the sector.
Wider political agendas around funding, regulation and access to justice.
How might these key drivers of change impact on the profession?
The gap between successful and struggling firms will widen leading to more consolidation.
The ageing solicitor population means that greater numbers of small and medium sized retail firms are likely to face problems of succession and closure.
Solicitor firms in the consumer market will feel the squeeze from a mix of funding cuts, process automation and cheaper volume providers, again resulting in increased consolidation.
The specialisation of work will continue as firms seek to carve out profitable niches.
Digital technologies continue to pervade legal services and everyday life. Digital infrastructure will increasingly improve performance.
There will be greater flexibility of work and employment contracts for all, from solicitors to paralegals, in response to the need to adapt to market volatility.
An hourglass shaped employment market will develop, with increasing competition faced by low skilled workers and specialists/senior staff, and the hollowing out of the middle of the workforce.
The number of diverse business models will increase, funded through external investment and using capital to drive innovation in service delivery.
Consumers will seek alternatives to lawyers or use them in different ways. In place of lawyers will be greater self-lawyering, online services, entry by unregulated businesses, and also by regulated providers, such as accountants and banks.
Any Battle plan needs to take into account these factors if it is going to drive success
There are four routes solicitor firms might adopt to improve their business prospects and profitability moving forwards:
do the same as before but better;
do similar to before but begin to focus on a specialist niche;
do less than before and focus on early issues or preventative measures;
do things different – rethink the approach.
Whichever route you choose Innovation will be key
There are seven standard measures of innovative activity commonly used in businesses:
Service innovation – the provision of new or significantly improved services.
Radical service innovation – services new to the market and introduced before competitors.
Innovation in service delivery – significant changes in the way services are delivered.
Strategic innovation – a new or significantly changed corporate strategy.
AMT innovation – any advanced management techniques such as knowledge management systems.
Organisational innovation – major changes in organisational structure such as the introduction of team-working or outsourcing of major business functions.
Marketing innovation – changes in marketing strategies or channels.
Whatever innovative techniques you adopt they must impact on the following
(a) Brand and quality of Service
Have you ever asked yourself these very blunt questions?
“Why should a potential customer choose our firm as opposed to a competitor?”
“What actually differentiates our business from the competition?”
The most common answers are, we like to think that we are approachable, give a quality personal service, are efficient and are specialists. Most firms in the UK would list the same meaningless platitudes, often on identical looking websites or adverts that have all been designed by the same marketing or web company. The reason these comments are meaningless is that none of them distinguish you from your competition; they are simply implied attributes of all Solicitors.
Firms have to challenge themselves to say something about their firm that is unique or at least distinctive.
Clearly, if it is hard for you to clearly differentiate your firm, it is going to be even harder for a prospective client to appreciate why they should choose your firm over the competition.
Law Firms all fall into the same trap blowing their horns about how great they are, which is a real turn-off for the Client, as it makes them look and sound arrogant, self loving and aloof. The key is not what you say but how you make the prospective client “feel”. To really differentiate your firm you need to understand that feelings are key and this needs to form the cornerstone of your brand. This, in turn, needs to be believed by your staff as the adage that ‘people buy people first’ is absolutely true .
(b) Improve Client loyalty.
Remember that the Client comes first. To a Client unless your service creates value he will not be your client. Without clients, there is no reason for a lawyer to exist.
Clients want solutions not billable hours.
Like it or not cumulative factors have led to a change process in the legal market sector. This has brought to the fore the issue of being able to identify what potential clients want from legal services. Will high street brands entering the market will be attractive to potential clinets? How do they want their legal advice delivered? How much they are prepared to pay for it
We should all be asking ourselves a simple yet fundamental question: does our service deliver value to the Client? Before you answer this question your business needs to have a shared understanding of what value actually is. Beauty is therefore in the eye of the beholder – value means different things to different types of client, purchasing different types of legal service. Despite the hype there is no evidence that Alternative Business Structure’s entering the sector will alter consumer opinion on this subject.
Quality, price and value however weigh heavy in the consumers mind. If traditional law firms can deliver measurable value they will flourish as clients favour locality and personal recommendation as major decision drivers and they will love you forever and recommend their friends to use you.
(c) Get Staff buy-in
No business or Brand ever succeeded without a committed and loyal workforce who bought in to the Business Plan.
Recruit the best, train them, reward them but most importantly make sure they feel included. I believe that staff inclusion is one of the failings of most law firms. Make sure that they understand the Business Plan and their role in it. Ensure they have access to appropriate Management Information for their area of responsibility and that they receive at least half yearly management briefings of the overview. Inclusion is not just about the dissemination of information it is also about intelligence gathering. For example, consider forming Management committees comprising a range of staff members to gain their views and to test drive ideas. This is particularly important for staff sensitive issues such as reward and remuneration structures.
If the staff love the firm they are more likely to be able to convey its value to the client and create a culture that will drive he business.
(d) Get the buy-in of financial backers
Whilst cash is king most Law Firms need financial support from banks and various secondary lenders to trade and develop their businesses.
Despite the financial problems encountered by many firms in the sector over the last few years the major banks still have a positive view on lending to Law Firms. Whilst there is an appetite to lend, banks have become more astute in their understanding of the sector. Lending is always contingent upon a comprehensive business plan being provided that is backed by sensible budgets and cash flow forecasts.
Once lending is authorised maintain the relationship by providing the bank with full monthly management information and by sticking to cash flow forecasts. If a cash flow deviation is predicted then let the bank know first as unforeseen overdraft spikes concern them.
If you are struggling do not be afraid to ask for help.
Utilise External knowledge and resource.
As law firms become more complex in their structure the challenge lies in developing new skills to cope with the pressures placed upon the business. To this end firms need to recognise that outsourcing back office functions such as human resources, accounting, information technology, marketing and client call centres can provide a cost effective solution to the challenges faced. In many of the law firms that I have assisted in turnaround I have found that many of these functions are often mis-managed resulting in cash being burnt and no real value for the firm being created. Often an austerity exercise reduces the “cash burn” whilst outsourcing provides the solution in a better managed package for firms struggling to deal with too many issues.
Utilize Business Management Consultants and Non Executive Directors.
I am constantly surprised at how many law firms fail to avail themselves of the benefits of having a non-executive board to assist them drive their businesses.
Lawyers tend to have similar backgrounds, education and training and often as not senior managers, in all likelihood they will have been with the same firm for many years. Lawyers therefore tend to have a narrow range of life and business experiences, which can hamper them when dealing with new challenges in a sector which has suddenly become quite dynamic. Properly selected Non Executive Directors can provide a creative contribution to a firm, an independent oversight and a constructive challenge to the managing partners.
Similarly Consultants can assist on a more full time basis to compensate for the “business educational gap” that many lawyers feel through being trained as lawyers as opposed to businessmen. The key is to choose the right consultant who can mentor the managing partners to assist them make the right decisions themselves rather than making the decisions for them.
Phase 3: The completion of the project
Whilst developing your business always keep an eye on your exit strategy
Whilst focusing on creating successful and profitable law firms I always like to challenge my clients on their exit strategies and succession plans. Is the plan to sell the firm and realise its full value or to maintain its independence with a succession of emerging partners? In either case a great deal of time is needed in preparation.
If you would like to discuss this article further or need help with any form of management or business development issue then please send me a message.
Guy Barnett