How firms can shape up to boost profits

Setting benchmarks to measure and assess performance can help firms move in the right direction and boost profits.

Firms might all strive to increase revenue streams, profitability and client retention, but if they do not focus on their financial management, those who are faster and more efficient will. After all, each week we hear stories that the market in which we operate is becoming more competitive, not only between legal practices but through new entrants seeking a share of the spoils.

Ben Cooper, partner and head of probate at Eaton Smith, says: ‘It is very easy to be cocooned within your own business and not be aware how other firms are performing in relation to your own firm. Benchmarking is a useful tool to demonstrate where we should be going and what we should be aiming for.’

Benchmarking can provide firms with a wealth of information relating to their own performance, strategic objectives, service differentiation, staffing, billing and, ultimately, profitability and the comparative position of other firms. Nick Redman, finance director at Rix & Kay says: ‘It’s a useful tool for measuring our firm’s key performance indicators (KPIs) against sector averages. We find the fee income by fee-earner and partner very helpful, together with the overhead analyses and lock-up figures.’

There are several well-known financial benchmarking services operating in the legal sector, such as the annual Law Management Section Survey, in association with MacIntyre Hudson, PricewaterhouseCooper’s annual survey, or LawNet’s annual survey in association with BDO Stoy Hayward. Peter Bateson, practice director at Andrew & Co, says of the latter: ‘The comparison to other firms of a similar size and region means that we get reliable and meaningful data which is unavailable elsewhere. We focus on two or three variables where we are below average for our peer group and work at improving them.’

So how can benchmarking results be used to improve business, both financially and operationally?

Benchmarking profitability

A firm’s ability to generate fee income and control expenses has a direct impact on profitability. Firms can benchmark profit per equity partner by firm and department, enabling them to identify areas to target or reform. They can also look at profit per full-time fee-earner and profit as a percentage of total fee income.

Sound financial management is the basis for increasing profitability. Firms can also choose to focus on their most profitable clients and work areas, cross-selling more services, streamlining processes through the use of technology and taking a holistic view of client purchasing patterns, from a ‘cradle to grave’ perspective. Decision-making based on facts and figures is crucial for effective strategic planning.

Financing the firm

The main financing requirement for most firms is for work in progress and debtors. Work can be in progress for weeks or even months before it can be invoiced. Measuring such lock-up is a useful method of comparing work streams within a firm, analysing the number of days taken between time being recorded and the cash being received, which can differ between departments, for example conveyancing and personal injury.

‘The comparison of our lock-up figures has provided us with support for instigating more regular reviews on outstanding debts and WIP, and prompted investment through our case management system of automated debt follow-up processes,’ says Redman.

Firms should pay particular attention to their credit control to make sure they do not suffer from increasing strain on working capital through longer lock-up, or reduced profitability through bad debts.

Lock-up directly impacts firms’ profitability – the greater the amount of lock-up, the higher a firm’s finance costs. Firms, therefore, should consider the following:

• Monthly reviews of all work in progress and debtor balances for each client during the month, making all fee-earners accountable for their lock-up;
• Assigning responsibility for co-ordination of debt and work in progress management to a member of your accounts team;
• Setting monthly targets for billing and cash collection based on fee-earners’ analysis of lock-up balances;
• Targeting clients and matters where work in progress or debtors exceeds agreed levels;
• Analysing client profiles – find the right clients for your firm and agree regular billing while work is progressing;
• Linking drawings to performance in managing lock-up.

It is not enough to limit discussions of lock-up at partner level – all fee-earners should be educated about how it affects the business. Steven Booth, managing partner of IBB Solicitors, says: ‘We communicate the results to all partners and directors of support services to promote debate, questioning and examination of spending heads.’

‘We use benchmarking results to help set a range of objectives in relation to our business planning,’ says Cooper at Eaton Smith.

By benchmarking priorities such as those described, year-on-year trends can be identified. ‘The survey results give you the ammunition to tackle the status quo and set a realistic target for the incremental change you would like to make year on year,’ says Bateson.

Firms can compare personnel procedures, such as annual holiday entitlement and incentives for introducing clients. Creative HR can be beneficial to help you attract and retain the best people.

Bateson’s firm benchmarks salaries against regional information, and compares charge-out rates against other local firms. Redman’s firm uses benchmarking figures ‘to help focus on areas where we believe we can improve performance, but they are equally useful as a motivational tool where they endorse our actions and demonstrate that our results compare favourably’, he says.

Participation in benchmarking activities can yield significant results, but it is how you put these to good use that will make the difference.

Helen Simpson is director of member services at LawNet, a collaborative national network of independent, medium-sized firms.

www.lawnet.co.uk

Beyond the numbers

Financials aside, the sort of areas that may be useful to benchmark from a management perspective, to assist with strategic thinking and market awareness, include:

• Training and developing staff
• Recruitment
• Client satisfaction/retention
• Improving risk management
• Improving profitability
• Implementing IT systems
• Effective working capital management
• Marketing the practice
• Alliances/mergers with other firms