Improving financial management – changing behaviours
The reality in law firms is not quite what it seems
On a quick review of the legal profession you could fall into the trap of believing it is a hugely successful sector. Growth has been consistent over long periods of time and profits have been increasing steadily, so what could be wrong? Unfortunately, too many firms confuse growth with profitability. It is relatively easy to get work that will not generate good margins but clearly it is harder to find high margin work.
The reported profit in firms trading as LLPs or partnerships has no salary expense for partners and therefore the reported profit is not really the true profit. The profit figure is actually the salary paid to the partner for working in the firm and hopefully some real profit from the business in addition. An argument can be had about what would a fair salary be for a partner but once this adjustment is made the profit figure is reduced dramatically, and in perhaps about half of all firms there is now a loss being made. There would not be many other sectors which have survived for decades where over half of the businesses in the sector trade at a loss. Whether profitable or not, there must always be a way of improving performance and generating improved outcomes.
Improving financial performance requires simple disciplines
Most firms elect a managing partner to run the firm. Management is left to this person while everyone else carries on focusing on the delivery of service to clients. Not surprisingly, the managing partner cannot organise the sound management of every file, lawyer, department and the firm. The managing partner can only do their job properly if everyone helps the managing partner by managing their matters, teams and departments properly. Good financial management matters and it is the responsibility of everyone to manage their work well. Financial management is not difficult, the problem is that it is left until there are no pressing client needs; in other words, it seldom happens.
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Firms should encourage everyone to think about the routines that need to be followed if matters, teams and the firm are to be run better. Once routines have been established, they can be built into diaries. Once routines have been tested to ensure that they deliver the desired outcomes, further thought can be given to whether the routines could be delegated to more junior colleagues. Hopefully, once routines have been run for long enough they become second nature and behaviour has been changed.
What routines might be helpful?
Every firm is different, but the following routines should be considered in most firms:
- Time capture – In a perfect world, all fee earners would record their time throughout the day. The reality is that most people struggle to record all of their time and are often guilty of trying to record time at the end of the day, week or month by which time considerable time could now be lost. As a minimum, everyone should spend a few minutes every morning just ensuring that time records are up to date before embarking upon another busy day. If records are not up to date, then other people cannot raise bills when they want.
- Managing WIP – Unbilled time needs managing, and clients need to be updated so that their expectations around billing and timeframes are satisfied. Perhaps at the start of each month, fee earners should spend a few minutes reviewing their WIP for two purposes. The first is to consider whether the client should now be given a revised estimate of costs based on where the file is now heading. The second reason for reviewing WIP is to consider whether any further information is required if progress is to be made during the month so that a bill can be raised. If further information is required, then this should be sought at once.
- Billing – Bills should be raised as soon as possible. Most firms issue a large number of bills at the month end and it must be possible for some of this billing to be organised earlier. Instead of just thinking about billing on the 28th of each month perhaps fee earners could be asked to think about billing on the 14th and the 28th of each month. It will be less of a burden if the process is split in half and billing is generally easier while people can remember what has happened.
- Credit control – Once bills have been sent to clients, there have to be routines to ensure that clients then settle bills promptly. Diarising a call to a client 48 hours after a bill is issued might be helpful. The purpose of the call is not to chase for payment but to check that the client has received the bill, to see if they have any questions and to check that they are now happy for this to be paid. Once this process has been completed, credit controllers could start to chase a few days later if payment has still not been made.
Give everyone feedback so that it is clear what works
A good managing partner will not try to manage every file and will encourage fee earners to take financial responsibility for their own files. The managing partner should ensure that all fee earners have access to good accurate management information so that they can see for themselves which of these routines are delivering the required outcomes. If problems persist, then the managing partner might help individual fee earners and discuss alternative routines that could be tried.
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