Tips from the Law Management Section roadshow in Birmingham.
United States vice-admiral James Stockdale survived seven-and-a-half years of torture and solitary confinement in a North Vietnamese prisoner of war camp during the Vietnam War. His coping strategy: ‘Confront the brutal truth, but never lose faith.’ The dictum applies to law firms, which also have ‘brutal’ challenges to confront and overcome in today’s uncertain economy, or so claims a consultant at the Law Society’s Law Management Section (LMS) Survive and Thrive roadshow in Birmingham.
He is not the only speaker to use a colourful analogy. We are enjoined not to be ‘busy fools’ and are reminded that ‘turnover is vanity’. We are told to ‘look under the [car] bonnet’ before agreeing to merge with another firm. The legal services sector is compared with the Galapagos Islands, which also evolved without regard to the outside world. And a ‘hedgehog’ is a good example of a niche firm, but more on that spiny mammal later.
LMS chair Robert Banner, who is an executive director of Derbyshire firm Banner Jones, welcomes us to the roadshow. He runs through the familiar litany of current threats to firms: the economic downturn, new entrants to the market, cuts to legal aid, the Jackson review. But all is not lost, he says: ‘The economy is improving and it is no longer all doom and gloom.’ Banner obliquely introduces the speakers: ‘If your firm is in trouble, don’t keep it to yourself. There are accountants, banks and consultants on your side.’
One such accountant is Patricia Kinahan, joint head of the legal team at Gloucestershire accountancy firm Hazlewoods and a contributor to the annual LMS Financial Benchmarking Survey. She makes ensuring that law firms ‘survive and thrive’ sound a simple matter of common sense. She urges attendees to concentrate on profitable work, have partners that generate business and plan for succession.
‘Turnover is vanity,’ she says. ‘What you need to focus on is fee income per fee-earner [and how that translates into profit]. You need to understand what fee-earners are doing day to day, hour to hour. Don’t be busy fools. You say you are busy, but are you really? You should probably be billing seven hours a day, but some firms don’t manage more than three hours – and yet they say they are busy. Why?’
Kinahan turns her attention to cashflow. ‘More than half of Britain’s small business failures are due to cashflow problems, not lack of profit,’ she says, instancing two major law firms that, despite showing profits on their balance sheets, became insolvent last year. ‘There is a lack of understanding in law firms about the crucial distinction between cash and profits.’ She explains that plenty of work in progress (WIP) can give the misleading impression that all is well with the firm, but until that WIP is invoiced and payment received the firm is effectively giving free credit to its clients without having the cash to meet salary and other bills.
She suggests further commonsense ways to keep the cash flowing. One should set a target WIP level for each department ‘because one week’s reduction in lock-up [work completed, but not yet billed] can make a real difference’. She urges practitioners to ‘make billing both urgent and important to avoid the end-of-month bill rush and to encourage billing throughout the month (because) you could get paid a whole month earlier.’
Firms should have a system that makes billing simple so that fee-earners can prepare invoices themselves, recommends Kinahan. ‘Send your bill the moment you get a good judgment. Happy clients will pay up if you have done a good job for them,’ she says.
Finally, and this is an example of confronting the brutal truth, she says: ‘Any client that does not pay is not a good client. Don’t continue working for them.’
Under the bonnet
NatWest’s head of professional sectors and financial institutions Steve Arundale takes the podium to ask what will happen to the 10,000 firms that have opted not to become alternative business structures. He answers his own question: ‘Some 240 have closed and not always because they couldn’t get professional indemnity insurance. Some just wanted to close, but didn’t quite get around to telling the Solicitors Regulation Authority.’
Others, Arundale says, have simply carried on, often with the help of non-lawyer business people to help them run the practice more efficiently. Still others, he adds, have gone the mergers and acquisitions route, which is an uncertain process and needs to be approached with business-like caution. ‘Merger success isn’t written in the tea leaves,’ he warns.
He lists some of the weaker reasons lawyers have given him for merging with another firm, such as: ‘I have done it before so it will be OK’; ‘I know their accountant’, and ‘We have three years to repay the retiring partners’ capital’.
Mergers pose all sorts of potential risks, such as ‘picking up liabilities’ of which you were unaware. Arundale states: ‘You wouldn’t buy a house without having it surveyed first, so why buy a firm without getting an expert to look under the bonnet and check all is as it should be? The facade is not always the full story.’ Banker’s hat on, he advises: ‘Don’t make a financial commitment before talking to the bank. Present us with an analysis of the merger partner’s accounts for the last three years. Explain them and tell us why the merger is your preferred route.’
Arundale next turns to the importance of healthy cashflow. ‘You need cash to fund growth, service investments and debt, and pay tax and VAT bills,’ he says. ‘You also need it to repay partners’ capital and service partner drawings. You might want to include all of this in an overdraft facility, but don’t leave the discussion with the bank until your staff’s payday.’ Like Kinahan, he instances the demise of a major law firm last year whose books showed no shortage of profits, but which went under because it ran out of cash.
The third and final speaker is consultant Barry Wilkinson of Kenilworth consultancy Wilkinson Read & Partners. He specialises in advising medium-sized law firms and provides food for thought. ‘Legal services are in transition from the certainties of a regulated market to an open market,’ Wilkinson says. Like the denizens of the Galapagos Islands, which include 30cm-long rat-eating centipedes, legal services were allowed to evolve with no regard to the wider world. That has all changed and there will be evolutionary ‘winners and losers’ now.
To thrive, law firms must ‘reduce lock-up and revise their costs structure, which should make a major difference within 18 months’. He explains that the market has been ‘hollowed out’ by deregulation, technology, globalisation, low-cost competition and austerity measures introduced by politicians. ‘The result is the market is hourglass-shaped, with the strength of big firms at the top and, at the bottom, firms that have made a success of using technology to commoditise law,’ says Wilkinson. ‘The challenge is to escape the squeezed middle by working smarter and giving better value to clients.’
Firms can be winners in several ways, he says, such as retaining independence or merging on satisfactory terms with a suitable partner. Losers are people who ‘give up because it’s not worth it’ or become insolvent.
He references US vice-admiral Stockdale, who confronted the ‘brutal truth, but never lost faith’. We cannot bury our heads in the sand and hope all our problems will just go away. We have to accept that there will be consolidation in the market. ‘There will also be casualties,’ says Wilkinson, ‘but keep the faith and you do not have to be one of them.’
He gives some practical tips on thriving. ‘We all have clients who are a pain in the neck and waste our time,’ he says, ‘so price them out or throw them out. Bad clients drive out good clients because they use up so much of our time. Serve only clients who want to buy what you want to sell and value your service. And make sure they get what they want.’
Wilkinson asks practitioners to consider what clients are really buying. ‘Are they buying legal services, which we provide, or is their real priority buying a house or getting a divorce?’ He mentions the old chestnut about when we buy a drill – is it the tool we want, or are we more interested in holes in the wall so we can put up a shelf?
At last, he gets to our spiny friend, the hedgehog. ‘Foxes can’t eat hedgehogs because hedgehogs do one thing brilliantly – they roll up into a ball and be prickly. That’s the hedgehog’s niche practice. It is what it does best and everyone acknowledges that nothing else does it better.
‘You should find your niche,’ urges Wilkinson, ‘in case it doesn’t find you first.’
Alternatively, become a ‘local hero’ by dominating the legal services market in a defined area and being recognised as the best. ‘People only refer the best, not the cheapest,’ says Wilkinson, ‘because they don’t want to be blamed for recommending someone who skimps on quality so as to keep the costs down.’
He reminds us of the business-building mantra, three of the Rs – repeat (business), referral and recommendation – and then tells us about a certain dentist in Australia. Paddi Lund, says Wilkinson, built a highly profitable practice from an unorthodox business model. ‘He only accepts new patients by referrals from existing ones. If you become one of his patients, you are asked to refer someone like yourself to join the practice. That way Lund has the business he wants from the kind of people he wants.’
Wilkinson ends his address on an upbeat note. ‘To thrive, you should know what you are selling and why clients buy from you,’ he says. ‘The fastest-growing supermarkets are Waitrose at the top end of the market, and Aldi and Lidl at the other end. They are polar opposites, but they know what they are selling and they know their customers. Do you?’
- To register for other Survive and Thrive roadshows in February and March, go to the Law Society website.
Jonathan Rayner is Gazette staff writer