Managing growth in 2014-2015
Legal businesses are no different to any other business – they need to be managed. As most law firms still have March or April year ends, this is the time of the year when many firms are thinking about their budgets and targets for the coming year. It is really important that the budgets and targets set are realistic if the management information that is to be circulated throughout the year is going to be helpful to manage performance and to challenge behaviour.
What needs to be controlled and managed?
Given that the profit for the year will be income earned less expenditure incurred, these are the two main headings for the budget. Expenditure needs to be controlled but it will usually be down to a small number of people to manage the expenses so most fee earners can concentrate simply on fee maximisation.
Fee earners are paid a salary and firms therefore should look to maximise the multiple of fees to fee earner salary costs to deliver both high gross and net profit margins. Traditionally, good firms have said that if a firm can achieve fees equal to three times salary costs then this is good. Most firms have been experiencing a lower multiple in recent times and if the multiple drops to just two and a half times salary costs it makes a very significant difference to profitability.
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How should targets such as these be set?
There are really two credible ways to set budgets; you either take the figure achieved last year because we are always looking to beat that, or you look at the benchmarking surveys for comparable firms and set targets at the upper quartile level. If you want to see the largest survey of the UK legal market then look at the NatWest annual survey which I write at www.nw-businesssense.com/legal-report.html. Once the fee income targets have been set, it is important for them to be broken down by teams and by individual. These targets need to be discussed with individuals so that they understand their target and know what needs to be done for it to be achieved. Only then will the budget be used as a sensible check against actual performance.
When discussing fee targets with fee earners, it will be important to show them that fees can be increased in many ways including by working harder, working smarter, learning to price work more creatively or by improving the level of client service.
Monitoring progress with good management information
Management information is effective if it is changing the behaviour of the recipient; this rarely seems to happen in legal businesses. The lack of change in legal businesses tends to be because either, there is too much information and the recipient cannot see the wood for the trees or because the recipient does not take ownership of the information. It is vital that distributed information is kept simple and focused and that it just gives feedback on the things which you want the fee earner to manage.
Many legal businesses confuse the information that fee earners need to do their day to day job with the information that they need to manage the business. For example, to provide a client with an update on costs on a particular file a fee earner needs to be able to see a detailed WIP report. This report does not however show the fee earner the number of WIP days which they are carrying which is what they need to manage.
In a similar way, by looking at WIP on a particular file a fee earner can see the hours they have recorded on that file but this will not tell them whether they are on schedule to achieve their hours target for the year. There is a real danger that fee earners will just look at what they need to for them to do their job for clients. As a result, they will not necessarily achieve the targets set for them by the firm.
If fee earners can be encouraged to monitor their actual performance against credible budgets on a regular basis there is every possibility that fee earners will start to change their behaviour and there becomes more chance of the firm achieving its financial aims.
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