In the Law Society’s Managing for Success magazine, Alex Shacklock talks about improving commercial performance in Law Firms, which is relevant now more than ever across all professional services firms!

Introduction

Professional services firms, and in particular law firms, have always faced the challenge of managing the tension between the two conflicting ‘forces’ of Professionalism and Commerciality. The majority of firms provide high-quality and valuable advice and solutions to their clients, yet many struggle to capture a fair share of that value and turn the output into profit and cash.

A recent survey of Legal Finance Executives for BigHand’s Global Cash Flow and Profitability report highlighted that firms are struggling at every stage of the commercial process – from under-scoping work at the outset, to using the wrong resources to undertake the work, to cash collections. Many firms in the UK continue to suffer the squeeze on profit margins that has been the trend over the past few years and firms are grappling with deteriorating lock up.

A quick look through the abundance of data that is available to benchmark the financial performance of law firms suggests that approximately 30% of UK Law Firms have lock up in excess of 130 days – and the average level of lock up is 84 for small firms, 131 for large firms and 142 for very large. We recently worked with a firm of ~ £35m turnover which was struggling with available cash resource – and was carrying nearly £18m lock-up of WIP and debtors! Just think about that for a moment. Over a period of six months, none of the value from blood, sweat and tears delivering client service has turned into tangible cash.

Whilst competitive market forces and client buying intelligence puts significant pressure on commercial performance, firms need to look at their internal processes, systems and the habits and actions of all staff as these have a huge impact on key financial measures.

When working with law firms we consistently see:

• A lack of understanding, across all levels of staff, of the basic financial operation of the firm
• ‘Cheap’ discounting of fees and fee crumbling
• Significant build-up of lockup
• Lack of effective matter scoping
• A reluctance to identify greater fees for clearly created client value
• A lack of timely billing
• Poor fee earner utilisation
• Clients not being held to payment terms
• A lack of confidence in speaking to clients about fees and money owed
• High write-offs of both work-in-progress and receivables
• High levels of borrowing and wasteful interest repayments
• Delays to business decision making and inadequate inward investment due to a lack of cash

Whilst changing mindsets, habitual behaviours and deep rooted ‘ways of doing things’ that are entrenched in firms can be challenging and sometimes painful, it’s within the reach of every law firm to adapt and improve commercial performance. We believe it is crucial to begin to drive a keener commercial focus…today.

 A process to create a culture of financial accountability

Through our experiences with varying sizes of law firms, accountants, and other professional services firms, we have put together a clear process, of actions and interventions that can have a significant impact on top and bottom line and the cash generation cycle. The important thing is ensuring that energy, time and resource is invested in every one of these and, because the process is dynamic, continually revisited.

When firms decide that they need to take steps to improve commercial performance the usual ‘fix’ is to invest in training. That rarely works. Whilst education on the ‘what and how’ is important, in our experience this will at best, only provide a short-term boost in performance. Firms need to view the project as a longer-term change initiative – which means spending time digging down into the real issues, setting clear outcomes, identifying the best ways to fill skills, behaviour and mindset gaps and working out which cultural levers to pull to embed the new approach.

The process

1. Diagnose

Create a crystal clear, transparent and honest picture of the present position and understand the root causes of commercial underperformance. Not only does this help the firm to focus energy and resource on the right areas, but it also helps to create a catalyst for change.

a) Identify areas of commercial underperformance. What are the current financial metrics and commercial key performance indicators? e.g.

• Current top-line growth rates
• Margins
• Lock-up and Lock-up days
• Debtors days
• Total loans, overdrafts and capital accounts
• Billing patterns
• Number and volume of discounts given
• Amount of over-runs written off

b) Identify the total financial and strategic cost of underperformance

c)What is driving areas of commercial underperformance?

There most certainly will be variable levels of commercial awareness, knowledge, skills and confidence across the firm, but we usually find that the main drivers are cultural. Many firms have created formal expectations of financial management but the informal cultural forces have much more power and shape the habits, behaviours and decisions of people.

Think about:

What performance management and reward systems are used? How is good financial performance rewarded and celebrated and what is the consequence of not delivering? What are the tangible and intangible incentives which drive a focus on financial hygiene? Do teams and individuals have clearly defined commercial metrics?

What are the current financial policies and processes? Are they clear and effective?

How are we communicating financial information, instructions and messages? Is information transparent, are we emphasising its importance and are we consistent? How often are financial matters discussed in team meetings? Where does this sit on the agenda?

Are partners and other role models exemplars of effective commercial behaviours?

How seriously is financial management taken when the senior partners and finance director are not in the room’?

d) Finally – identify potential objections and blockers to change

Until you are confident that you understand just exactly what it is that you need to work on don’t move on – go back and dig further.

2. Design clear measures and outcomes

This is about creating a clear picture of what could be and what NEEDS to be. What level of commercial performance do you want to aim for? What will great performance look like? What is the absolute MUST level of performance? How is the competition performing? What levels of performance will put us into the top bracket in our marketplace?

How can all of these be broken down into targets, measures and clear delivery expectations at the firm and team level?

It is also about defining what you would like teams and individuals to think, feel and do differently in order to drive improved performance.

At this stage, this is more of a ‘top-down’ process involving senior partners and heads of both functions and teams. Ensure there are regular sense checks and that there is consensus that the defined metrics and performance expectations are realistic and, ideally, stretching.

3. Communicate!

To get people to do things differently and talk about financial hygiene, then you need to open up about the current situation, challenges, aspirations and plans.

Be as honest and transparent as you can to ensure that everybody in the firm is clear about:

• The current position (open up the financials, comparatives with the market etc.)
• The consequences of doing nothing
• The defined required outcomes, measures and performance expectations
• The process to support teams and individuals to deliver
• What achieving the vision will mean for the firm and its stakeholders

It is essential to create a communication ‘strategy’ to embed the key messages. Senior teams are often shocked to learn how poorly such messages are understood after investing time in communicating them through emails, management meetings and ‘town hall’ discussions.

But the amount of communication is not the issue. Part of the problem is that senior management measure communication in terms of inputs rather than by the only metric that actually counts – how well people actually understand what is communicated. Ensure that everyone can be ‘heard’. If people feel that they are involved they will be more engaged with the whole process.

4. Enable better performance

This is about providing teams and individuals with a choice of options to support them in building their knowledge and developing the right skills, behaviours and mindsets to deliver improved performance. Suggested areas of focus would include:

• Pricing
• Negotiation, persuasion and influence
• Effective client conversations and interactions
• Financial essentials

This should not just be limited to training workshops and programmes. To ensure that learning and performance support is relevant to all, and can be successfully transferred into effectiveness in the role, then the following ‘enabling’ methods are recommended:

• Simulations and experiences
• Social learning (sharing stories, successes, failures, lessons, tips etc.)
• Group and individual coaching and mentoring
• Developing resources and toolkits
• Encouraging self-directed learning (individuals ‘pulling’ relevant learning from source)

We run an interactive business simulation with a range of firms, large to small, which models the workings of a law firm. Delegates act as the managing board of a professional firm and compete with other similar firms, taking decisions relating to business development, pricing and scoping, negotiating, deciding on recruitment of staff to meet forecast client needs, management of premises and related costs, billing practices and how to ensure timely payment for work done.

Such experiential learning ensures that individuals have a deep understanding of how firms operate and the decisions that have to be taken in order to ensure commercial and financial success.

5. Locking in the change

We believe that most behavioural change initiatives fail because the new ‘ways of doing things’ are not effectively embedded into the ‘muscle’ of firms.

Locking-in means realigning the cultural levers to drive the ‘new’ behaviours and mindsets and then applying consistent and continuous pressure to these levers until the ‘way things are done around here’ looks just like those clearly defined outcomes designed in Step 2.

Key levers:

Ongoing consistent and clear messages It is essential to ensure that key messages are not lost amid the relentless whirlwind of information. 75% of change initiatives fail because communication is not continuous and relentless.

Leadership effort Leaders need to be seen to be leading the change effort. Commercial performance and progress against outcomes should be a prioritised agenda item, whilst members of the leadership team need to be demonstrating, and role-modelling, the new behaviours and habits.

Policies and processes This means adjusting relevant aspects of the employee life cycle and code of conduct – and ensuring that commercial performance behaviours and measures are included in performance and career management processes. Remember ‘what is measured gets done’!

Symbols, signals and practices This is about embedding commerciality into what really goes on. This could include:

• Meetings
• Prioritisation of tasks and time planning
• Feedback processes
• Internal dialogue
• Recognition events
• The creation of heroes 

6. Measure

Quite simply – comparing where you are against your starting position, and against your desired outcomes. If there are gaps against desired outcomes – revisit the process. If the outcomes have been achieved, then stretch them further and revisit the process.

In summary

Creating and maintaining a keener commercial focus in law firms is absolutely essential. Just like any other business, firms are reliant on commercial transactions and therefore need to invest in the processes to develop and embed strong commercial skills, behaviours and mindsets to drive effective financial performance.

Email Alex or contact us to find out how we can help and support you to improve the financial performance of your firm.