Blog: Law Firm Growing Pains
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12 April 2016 by Kelly Mills
Having the tools of the trade in place or putting them in place sooner rather than later could mend your broken profit. Changing the way you process work day to day can significantly improve your bottom line.
I said, profit, not revenue. Revenue may make you feel puffy, but I see many firms where revenue growth rates are at the expense of growth in partner returns, ie for some firms the more revenue grows so do expenses. More expenses equals greater responsibility and greater financial risk to your business.
Imagine you grow from a position of $1 million in revenue with expenses of $800k including wages for staff and 2 directors. Out of the $800k, each director pockets an annual salary of $150k. As profit is $200k, each director will take home an additional $100k each in dividend payments. Not ground breaking, but no kick in the teeth. Profit to revenue ratio is 20%.
Times look good and your firm grows organically, accidentally or due to a marketing push. You hire more solicitors, then admin staff and even new senior associates. Some time on, perhaps in 2 to 3 years, and you have revenue of $2 million. Expenses including wages of staff and directors are now $1.7 million, thereby generating a dividend payment to each director of $150k. While celebrating your growth, stop to consider that profit to revenue ratio has actually fallen to 15%.
It’s easy to feel successful for having increased income to each director by $50k but at what cost? The growth now means increased responsibility to maintain this level of incoming work in order to sustain your higher fixed costs relating to payroll expenses, increased office space, equipment, and other creditors. Consequently, your business overdraft has increased to accommodate the highs and lows of cash flow. A lot to shoulder for the additional $50k.
On the eve of your growth, or anytime thereafter, did you consider what systems, processes or staff guidelines were in place to ensure efficient handling of matters? Did you really need that last solicitor and admin person you hired, or where you just throwing people at the problem, instead of asking for more effective and chargeable production on each file?
It’s easy to feel successful for having increased income to each director by $50k but at what cost? The growth now means increased responsibility to maintain this level of incoming work in order to sustain your higher fixed costs relating to payroll expenses, increased office space, equipment, and other creditors. Consequently, your business overdraft has increased to accommodate the highs and lows of cash flow. A lot to shoulder for the additional $50k.
Are your staff in the office for 8 hours a day, but struggling to charge 4-5 hours of time (or equivalent if you do fixed fee work)? Unless you believe they are incompetent, staff could be losing time, spending 1 hour on a document but only charging for 45 minutes, because 5 minutes is lost in finding the template, then filling in inane data manually, then double, triple checking it because they used an old document, and need to ensure that all legacy data is copied over, saving the document three different places, and on and on, or any number of similar lost productivity issues. Because what works when you are a firm of 2-5 lawyers won't suffice when you are 10-12 lawyer firm, for example.
Its easy to stand firm and say, it worked just fine when we were smaller. But, perhaps it’s time to stop and review your business, and consider what changes are necessary to either make the system you currently have perform at its peak or consider a new system platform that can efficiently handle your growth. In the haze of poor systems and processes, it is also hard to see which staff are valuable to your firm and so who you need to retain.
Growth is good, but profitable growth is better (and more sustainable). So, take time to:
  1. Objectively assess what processes are under strain - your staff will gladly highlight manual and mundane processes;
  2. Calculate the opportunity cost of these inefficient processes whether that be less time by fee earners to work with clients or by admin staff to issue invoices, chase up debtors etc;
  3. Contact your software providers to understand how effectively you are utilising their existing functionality to streamline office processes and matter management. What training is available to upskill your team?;
  4. With a clearer understanding of your growing business needs, talk with other technology providers to gauge what’s on offer. The cost of changing software could be less than the ongoing opportunity costs incurred due to lost productivity.

Growth (or the desire to grow) offers an opportunity to be strategic
Growth (or the desire to grow) offers an opportunity to be strategic and involve key staff to assess the firm’s needs (current and future) and the changes needed. Always enforce changes with conviction. Nobody likes change, but it doesn't mean it isn't good for your staff or your bottom line.
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