How can small firms make themselves more profitable? Peter Scott suggests that partners must accept that management is a vital tool

A Gazette article earlier this year reporting the tight profit margins of many smaller firms highlighted the continuing inability of practices to manage themselves as businesses (see [2004] Gazette, 18 March, 1).


Many firms have the basic ingredients for being highly profitable businesses but they are not making the most of themselves. There can be many reasons for this, but one of the most likely is that those trying to manage are prevented from doing so effectively by partners resistant to change and to being managed. How many managing partners are happy to ask partners:


• ‘Are you really prepared to be managed?’ Effective management is key to law firm profitability. A firm without good management will be unlikely to face up to its issues, which is fundamental to building a profitable firm.



• ‘Why are we continuing to do a type of work that loses money?’

• ‘How much is the bottom 10% of our client base losing us?’


To ask these questions and to then do something about them will take courage and determination when faced by backwoodsmen who refuse to listen or to change.


The Gazette article reported that ‘the narrow profit margins are mainly a consequence of the amount being spent on fee-earning staff’. This situation is unlikely to improve. Some managing partners are forecasting salaries to rise faster than they can build business.


This calls for greater productivity to be obtained from manpower, which should be structured to create the most effective fee-earner/ partner ratio, with work being delegated in the most appropriate, risk-free and profitable manner, with senior partners not doing work that trainees should be doing.


Running a tight ship should be the norm. Firms should apply zero-based budgeting to every overhead - particularly manpower - asking: ‘Do we really need this?’


Major overheads - manpower, premises, professional indemnity premiums - are difficult to reduce in the short term, but even in the short term, firms’ profits can be improved by making the most of what they have.


Firms’ profitability is typically hit by the ‘triple whammy’ of under-pricing, under-recording and under-recovery. By focusing on these areas, firms can work smarter to maximise the return from their existing businesses.


Take pricing, which is crucial to profitability. How many firms really know what their markets will accept in terms of competitive pricing? Some partners will under-price just to get the work, however unprofitable it may be.


Under-recording exacerbates the problem. A partner recently admitted to me that he only records a half-hour when an hour has been spent doing the work. Time not recorded will not get billed. Full and honest time recording not only builds profitability but is an important management tool. The low chargeable hours in many firms are usually a combination of under-recording and over-manning, and result in profits being poured down the drain.


Having already discounted by under-pricing and under-recording, partners throw away more profit by writing off time when billing, a major cause of low profitability. On the other hand, to improve recovery rates can be simple and painless, the effect going straight to the bottom line. What is needed is control by management of the billing/write-off process.


Experience has shown that the cumulative effect of the ‘triple whammy’ can devastate profits, but if remedial action is taken, the bottom line can lift off.


Building a more profitable firm will require not only determination by management but, more importantly, co-operation and discipline from partners. Are partners prepared to accept that discipline? Are they prepared to be managed?


Peter Scott is the former managing partner of Eversheds London and now runs Peter Scott Consulting