Law firms face the challenge of managing the tension between professionalism and commercialism. Most provide high-quality advice to clients, but many struggle with capturing a fair share of that value and turning output into profit and cash. Alex Shacklock looks at how to improve commercial performance in any law firm
Creating and maintaining a keen commercial focus is essential for law firms. Just like any other business, law firms are reliant on commercial transactions, and therefore need to invest in processes to develop and embed strong commercial skills, behaviours and mindsets to drive effective financial performance.
In this article, I look at what law firms struggle with around commercial performance, and offer a suggested way of improving performance in any law firm.
The key issues for firms
A recent survey of legal finance executives for BigHand’s Global Cash Flow and Profitability Survey report highlighted that firms are struggling at every stage of the commercial process – including under-scoping work at the outset, using the wrong resources to undertake the work, and ineffective cash collections. Many UK firms continue to suffer from the squeeze on profit margins that has been the trend over the past few years, and firms are grappling with deteriorating lock-up.
A quick look through the abundance of available data to benchmark the financial performance of law firms suggests that about 30% of UK law firms have lock-up in excess of 130 days; and the average level of lock-up is 84 for small firms, 131 for large firms and 142 for very large. We recently worked with a firm which had turnover of £35m but was struggling with available cash resource – and was carrying nearly £18m lock-up of work-in-progress (WIP) and debtors. Just think about that for a moment. Over a period of six months, none of the value from blood, sweat and tears delivering client service has turned into tangible cash.
In addition to competitive market forces and changing client-buying pressures, law firms’ internal processes and systems, and the habits and actions of their staff, often contribute to poor commercial performance.
When working with law firms, we consistently see:
- a lack of understanding, across all levels of staff, of the basic financial operation of the firm
- ‘cheap’ discounting of fees and fee crumbling
- significant buildup of lock-up
- a lack of effective matter scoping
- a reluctance to identify greater fees for clearly created client value
- a lack of timely billing
- poor fee-earner utilisation
- clients not being held to payment terms
- a lack of confidence in speaking to clients about fees and money owed
- high write-offs of both WIP and receivables
- high levels of borrowing and wasteful interest repayments
- delays to business decision-making and inadequate inward investment due to a lack of cash.
How to create a culture of financial accountability
When firms decide that they need to take steps to improve commercial performance, the usual ‘fix’ is to invest in training. However, while education is important, it will, at best, provide only a short-term boost in performance. Firms need to view the project as a longer-term change initiative. This means spending time digging down into the real issues; setting clear outcomes; identifying the best ways to fill skills, behaviour and mindset gaps; and working out which cultural levers to pull to embed the new approach.
Through our experiences working with law firms of various sizes, we have put together a clear process of actions and interventions that can have a significant impact on top and bottom lines and the cash generation cycle. The important thing is ensuring that energy, time and resource is invested in each of these and, because the process is dynamic, that each is continually revisited.
Create a crystal-clear, transparent and honest picture of the present position, and understand the root causes of commercial underperformance. This not only shows the firm where to focus energy and resource, but also helps to create a catalyst for change.
a. Identify areas of commercial underperformance
These might include:
- current top-line growth rates
- lock-up and lock-up days
- debtor days
- total loans, overdraft and capital accounts
- billing patterns
- number and volume of discounts given
- amount of over-runs written off.
b. Identify the total financial and strategic cost of underperformance
c. Identify what is driving commercial underperformance
Drivers may include poor commercial awareness, knowledge, skills and confidence in some or all parts of the firm, but we usually find that the main drivers are cultural. Many firms have created formal expectations of financial management, but the informal, cultural forces have much more power, shaping the habits, behaviours and decisions of people across the firm.
To understand your firm’s commercial culture, think about the following.
- What performance management and reward systems are used? How is good financial performance rewarded and celebrated, and what are the consequences of not delivering? What are the tangible and intangible incentives which drive a focus on financial hygiene? Do teams and individuals have clearly defined commercial metrics?
- What are the current financial policies and processes? Are they clear and effective?
- How are you communicating financial information, instructions and messages? Is information transparent, are you emphasising its importance, and are you being consistent? How often are financial matters discussed in team meetings, and where do they sit on the agenda?
- Are partners and other role models exemplars of effective commercial behaviours?
- How seriously is financial management taken when the senior partners and finance director are not in the room?
d. Identify potential objections and blockers to change
Until you are confident that you understand exactly what it is that you need to work on, don’t move on – go back and dig further.
2. Design clear measures and outcomes
This is about creating a clear picture of what could be and what needs to be. What level of commercial performance do you want to aim for? What will great performance look like? What is the absolute basic required level of performance? How is the competition performing? What levels of performance will put you into the top bracket in your marketplace?
Break these down into targets, measures and clear delivery expectations, at firm and team level.
You also need to define what you would like teams and individuals to think, feel and do differently in order to drive improved performance.
At this stage, this is more of a top-down process, involving senior partners and heads of both functions and teams. Ensure that there are regular sense checks and that there is consensus that the defined metrics and performance expectations are both realistic and stretching.
To get your people doing things differently and talking about financial hygiene, you need to open up to them about the current situation, the challenges, and your aspirations and plans.
Be as honest and transparent as you can, to ensure that everybody in the firm is clear about:
- the current position (the financials, comparatives with the market etc)
- the consequences of doing nothing
- the defined required outcomes, measures and performance expectations
- the process to support teams and individuals to deliver
- what achieving the vision will mean for the firm and its stakeholders.
It is essential to create a communication strategy to embed the key messages.
Also, remember that it’s not just the inputs of communication that count – that is, the amount and type of ‘push’ communication you do. What really matters is how well your people understand what is being communicated. Ensure that everyone can be ‘heard’. If people feel that they are involved, they will be more engaged with the process.
4. Enable better performance
This is about providing teams and individuals with a choice of options to support them in building knowledge and developing the right skills, behaviours and mindsets to deliver improved performance. Suggested areas of focus include:
- negotiation, persuasion and influencing
- effective client conversations and interactions
- financial essentials.
Your approach here should not be limited to training sessions and programmes. To ensure that learning and performance support are relevant to all, and can be successfully transferred into effectiveness in each role, the following ‘enabling’ methods are recommended:
- simulations and experiences
- social learning (sharing stories, successes, failures, lessons, tips and so on)
- group / individual coaching and mentoring
- resources and toolkits
- self-directed learning.
We run an interactive business simulation which models the workings of a law firm. Delegates act as the managing board of a professional firm and compete with other similar firms, taking decisions relating to business development, pricing and scoping, negotiating, recruitment of staff to meet forecast client needs, management of premises and related costs, billing practices, and how to ensure timely payment for work done. Such experiential learning ensures that individuals have a deep understanding of how firms operate and the decisions that have to be taken in order to ensure commercial and financial success.
How to embed the change
We believe that most behavioural change initiatives fail because the new ways of doing things are not effectively embedded into the ‘muscle’ of firms. So how can you do this?
Ongoing consistent and clear messages
It is essential to ensure that key messages are not lost amid the relentless whirlwind of information. Most change initiatives fail because communication is not continuous and relentless.
Leaders need to be seen to be leading the change effort. Commercial performance and progress against outcomes should be a prioritised agenda item. Members of the leadership team also need to demonstrate, and role-model, the new behaviours and habits.
Policies and processes
Ensure that commercial performance behaviours and measures are included in performance and career management processes. Remember that what is measured gets done.
Symbols, signals and practices
Signals can be used to embed commercialism into what really goes on. This could include:
- meetings (including open and honest discussion of financial performance and targets on team meeting agendas)
- prioritisation of tasks and time planning
- feedback processes
- internal dialogue (ensuring commercial performance and results are discussed internally in the same way as things like client wins or losses, and client satisfaction results)
- recognition events
- the creation of “heroes” or awards.
Compare where you are against your starting position, and against your desired outcomes. If there are gaps against desired outcomes, revisit the process. If the outcomes have been achieved, stretch them further and revisit the process.