Strategies for profitability in law firms

by Andrew Otterburn

The past two years have been good for most law firms in the United Kingdom and New Zealand with both profitability and cash flow improving. While there are significant issues, especially around staff retention and attraction, and also succession planning, most firms have done well.

There are also issues concerning certain areas of work, in particular the improved performance of many UK firms has been driven by a buoyant property market, and that may slow, especially over the next two years as the Brexit negotiations unfold. Additionally, some of the firms that have expanded the fastest in the last five years have been ones concentrating on personal injury and the British government seems focused on reducing the ability of people to litigate and generally making life more difficult for litigation lawyers. Fixed fees, increased court fees and removing areas of work from scope are all on the agenda.

So overall, profitability has improved, however there are growing risks that firms need to understand if this is to be maintained. As always, running a successful business depends on a small number of important areas.

Key areas to focus on

I believe firms need to focus on these if profitability is to be maintained and strengthened. There is a need for:

What gets measured gets done

Effective financial management is important, however you need to make sure you focus on the right figures. In most firms what gets measured gets done, and too much focus on the wrong things can have unintended consequences. For example:

Some of the very useful figures to report on and make sure everyone understands are, for each team or department:

Managing cash flow

Many firms have become cash rich over the past two years, however that position can easily be reversed. It is important to understand your cash profits rather than your accounts profit and to ensure drawings do not exceed the cash profits of the firm. It is also important to make sure everyone understands the numbers – training for associates and more junior lawyers on areas like working capital management can be hugely beneficial. Once they “get it” they are often very good at getting cash in and become better at scoping and charging for work. The starting point is training.

The winners and losers in fast-changing markets

Most firms, but especially smaller ones, are under pressure: from clients, who want better value; from staff – recruitment, retention and being able to match the pay of larger firms is an issue for many, and from the likely huge changes in technology coming over the next few years.

The UK and New Zealand legal markets are similar in that both have a large number of firms, most of which are relatively small.

There are about 10,000 law firms in England and Wales, but there has been a significant concentration of work in a smaller number of larger firms. Around half of these firms are very small with annual fees of under £200,000, and 70% of these have annual fees of under £100,000. Small firms may account for a large percentage of the total number of firms but they account for a small share of the work done. Most of the consumer and SME legal market is provided by the 2,000 or so firms with annual turnover in excess of £1 million. A classic 80:20 and the position may be similar in New Zealand.

Some of these firms are doing very well. Some of the larger firms that have emerged in the last ten years, those with a turnover of £5-10 million, are proving to be highly successful, profitable and innovative. They are often focused on “High Street” consumer and SME work, but are doing it well and locally. These firms are clearly some of the winners and are starting to evolve locally recognised brands.

The key for their on-going success and for many others also will be:

Of these, effective leadership is way and ahead the most important.

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by Andrew Otterburn

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