What type of growth do we want?
After 16 years of unbroken economic growth, the economy came off the rails in 2008 and has remained frozen since then. Most law firms are saying that they cannot really see their income growing and it will be difficult to trim costs further so their financial fortunes are frozen too.
Everyone continues to talk about growth, but there is debate about what sort of growth is required. Should we be looking to increase headcount, fees, profit or everything? It is interesting to reflect on how other industries have matured as it may have some bearing on what law firms do next.
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The diagram demonstrates that if a firm is small and not very profitable it is “insignificant” and can easily be battered by a competitive market. If it is large and very profitable then it is a “dominant player” and can survive shocks more easily and influence the market. So how does a law firm go from being “insignificant” to become a “dominant player”. History has shown that in other industries, it is always very difficult to go straight from one to the other and that it is usually necessary to go via one of the other states first.
If the strategy has been to get bigger first and then to improve profits then this has proved difficult to achieve. The desired outcome has more normally been achieved by focusing on profitability first to become “niche” and then to grow the size of the business afterwards. If the legal profession is to mirror other industries then the focus should be on improving profitability now and to worry about growth later.
So how do we grow our profits?
A law firm is a simple business; it generates fees and incurs expenses. An increase in profit is achieved by either reducing expenses or increasing fees. The recent frosty conditions have forced most firms to trim their costs as far as they dare without damaging the service they provide to clients. An increase in profit is therefore more likely to be achieved through an increase in fees. An increase in fees can be generated either through volume or pricing changes.
The perception, in most firms that I work with, is that there has been a drop in both the volume of work and the price that can be charged for the work. While every firm is different this is not what an analysis of the accounts of firms suggests. It is certainly true that recorded hours have typically fallen by 10-20% in the recession but when you analyse the recovered rate per hour this has generally held up quite well. This is interesting because it suggests that in really challenging times the price charged has not fallen. This suggests that there must be opportunities to increase prices, particularly when the economy begins to grow again.
Price increase can be achieved in a number of ways. It might simply be a case of being brave and putting the rates up. Alternatively, it might be more about thinking again about genuinely creative fee arrangements which would be helpful to the client and to the firm. Sophisticated firms realise that to increase the price to the client will require more innovative fee arrangements that are more closely aligned with delivering real value to the client.
Let’s hope that some firms can find a way through the ice and to a sunnier place where profits begin to grow again.
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