Is Your Iceberg Shrinking? (Part 2)

Are smaller law firms taking the best care of their business?

Back when the legal market was buoyant, and clients were streaming through the door, considering business efficiency wasn’t so much of an issue for smaller law firms.cost-management-small-law-firm-uk

There were good profits to be made without too much worry about balancing costs or thinking about business efficiency or marketing effectiveness (and other such management consultant babble).

Unfortunately, take away the clients, stagnate the market or reduce the legal aid budget and those management consultants start to sound like they might have a point. Do all three together and it’s time to sit up and take notice.

The iceberg is melting and something needs to be done.

In the last post, we touched upon these issues and questioned how we would build a boat that would help us survive the melt. We’ll take that a bit further this time and outline the three key structures we need to think about to build our boat, starting with:

The Hull – Cost Management

First things first, get control of costs. Now, let’s be clear here, we’re talking about cost management, not austerity for the sake of it.

Take the period from 2008 – 2011 as reported in the Law Society Cost of Time Survey 2011 (not the most recent, I know, but bear with me).

The 2010-2011 period showed a slight increase in profitability (following the heavy drops in previous years). But this was “primarily due to the reduction in costs rather than an increase in fee income” with cuts in support staff ratios over the previous 4 years featuring heavily.

Great. Costs are down. But with less admin staff, fee-earners take on more admin responsibility and therefore spend less time earning fees.

The response? Increase hourly rates to compensate. Great again. That balances, right?

Wrong. In a depressed market, increasing the cost of the service depresses demand further, exacerbating the problem and starting a spiral.

The proof? Fast-forward to the 2012 Cost of Time Survey and profitability flat-lined. But, surprise, surprise; hourly rates have gone up again. Spiral anyone? Now, obviously there are greater complexities involved than this, but it is telling that this action/reaction reared its head.

So clearly cost reductions alone aren’t sufficient – they must be balanced. Costs need to be analysed and any negative effects of reduction identified and offset. We’ll take a deeper look at cost analysis later in this series of posts, along with how the effects of cost reduction interplay with the other main structures of our boat. The next being:

The Frame – Process Efficiency

So, you’ve got the material for your hull. Now’s the time to make sure the frame you build it round is as sleek and quick in the water as you can make it.

It’s time to reduce drag and make your boat as efficient as it possibly can be.

Let’s run with the example above. Let’s say that instead of pushing up hourly rates after cutting support staff, smaller law firms instead addressed the issue of reduced admin support by streamlining the admin workload.

Instead of fee-earners taking on admin, reducing fee-earning time and pushing up hourly rates, some time could have been spent on automating the routine tasks that are inherent in legal administration.

In automating those tasks (letter production, billing, final accounts, legal aid applications, for example), they are no longer on a fee-earner’s to-do list – freeing up their time to get back to earning fees.

The need to increase hourly rates is gone and therefore demand is not further depressed. In fact (and forgive me for getting all economics professor here), in automating business processes sufficiently to reduce admin overhead, hourly rates could actually be reduced, stimulating demand and actually increasing turnover and profitability.

This works because cost have been reduced relative to turnover (remember we talked about cost management and not just reduction for the sake of it, earlier) and because of automation, fee-earners can now process more work in less time.

Please forgive the italics. I get overly excited sometimes.

Again, we’ll be analysing ways that we can make processes more efficient in further posts. You can follow along by subscribing here.

Anyway, we’ve outlined an alternative scenario, albeit a simplistic one, that highlights how getting the right combination of hull and frame can help us not just stay afloat, but do so with élan. But there’s one more element we need to address:

The propeller – Developing New Business

Again, running with the example above, we’ve reduced our costs and streamlined our business so fee-earners can devote more time to earning fees.

But, with no clients, those fee-earners are going to be twiddling their thumbs. It’s time for the tricky part – developing new business.

This is a topic so wide and varied that it will be the subject of lots of future posts and we’ll just mention some general points here.

If your practice has been using Yellow Pages and nothing else to advertise your services all these years, then there’s a LOT of work you can do to bring in new business.

And even if you’re further ahead and are engaging with potential clients online, there are new ways to reach your customer base emerging every day.

If marketing isn’t something your firm has really set its mind to then you need to start with two things in mind – analysis and imagination.

Who are my customers (or which customers bring me the most value)? How can I reach them more effectively? And, How can I measure whether the methods I’m using are successful?

Whether you end up putting ads on beermats in certain pubs (a classic and imaginative Ross Harper tactic) or engaging with clients through Twitter, we’ll be exploring how to analyse and develop new business right here.

To make sure you’re along for the ride, subscribe to this blog here, or follow me on Twitter.

Posted in The changing legal market, Uncategorized.