Rethinking the law firm business model

Talk of a global recession may be overly pessimistic but it is clear that the world economy is at the very least slowing down. Now is a good time for law firms to take a long and hard look at business practices to ensure they are positioned to weather any downturn. David Thorpe European general manager of Elite Information Systems advises a back-to-basics approach.

During periods of economic growth when law firms are prosperous and partners are happy with profits it is easy to take one’s eye-off-the-ball and let the firm manage itself. Whether the threat of a global recession is real or imagined it is the perfect reason to look at the business and make sure that it is being run as efficiently as it should be. With many firms having up-to- date technology and practice management system (PMS) solutions at their disposal law firms are able to get back to basics and review fee earner performance internal efficiencies risk reduction and competitive edge.

Fee earner measurements

Are all members of the firm gainfully utilised? What percentage of their time is being booked as chargeable work? Are they being managed effectively by their line managers? Study the utilisation statistics provided by the PMS and look for any trends that can be identified. Are any managers less efficient at utilising their staff? Are there any departments who are already finding it difficult to utilise their staff fully? Are any businesses requiring less resource than previously?

Booking time to chargeable matters is only half the battle. Is this time actually being billed on to the clients? Realisation compares the value billed to the original value of the work-in-progress. The PMS may tell us that fee-earner A is only 80 per cent utilised but has a realisation ratio of 90 per cent while fee-earner B is 90 per cent utilised with a realisation ration of 75 per cent. Assuming a baseline of 1 800 hours fee-earner A will bill 1 296 hours whilst fee earner B will bill 1 215 hours. The results are not too dissimilar but point to different management issues.

Of course any work-in-progress billed or otherwise is only of value if it generates cash. The firm should also be looking at the cash collection hours per fee earner. A fee-earner with acceptable realisation ratios but poor cash collection in respect of those hours may be less effective than a fee-earner with lower realisation but higher cash collection. Lower than expected cash collection is a third management issue to be considered.

Internal efficiencies

Now would be a good time to review internal administrative matters to review how efficient or otherwise these may be.Law firms use a myriad of paper forms from client and matter inception through cheque requisition expense claims cash receipts transfers bill authorisation...the list is endless. These forms require one or more staff members to manually enter information and eventually someone keys this same data into the PMS. Some PMS solutions now provide electronic forms as part of their offering. Here the forms are completed on-screen by the originator routed using email and once digitally authorised update the PMS without the need for re-keying data. If such methodologies are used then the role of back office staff can be changed from data entry to data analysis.

An analysis should be carried out to focus on how much back office staff time is spent producing hard copy reports for distribution and whether there a more efficient way of distributing data to fee earners and managers. Email can be used as a delivery mechanism and even better if the firm already has an intranet reports can be published on it and viewed firm-wide.

Similarly how easy is it for law firm management to find out how the business or their department are performing? Do they have the information they require available on demand? Too many law firms still rely on end-of-month management packs implying that managing the firm takes place on a once-per-month basis. Managers need to have access to data throughout the month allowing them to deal with issues as they arise. Given the ease of use of web browsers intranets are proving the optimum way of delivering this data to managers. If the firm makes its intranet available also as an extranet then managers can still access PMS management data while travelling or working from home.

Minimise risk

Close attention should be paid to your clients’ market sectors. Analyse trends by the business types of your clients to identify at an early stage any sectors that are slowing down.

Be aware of exposure levels; not just outstanding bills but unbilled work-in-progress unbilled disbursements and outstanding bills. These are of no value until they are paid. Have the PMS system alert managers by email where exposure levels for specific clients specific market sectors and specific matters exceed pre-defined thresholds.

How quickly is the firm converting work-in-progress into bills? Could clients be billed on a more frequent basis to reduce exposure and maintain cash flow? Is it the inefficiencies of the billing process rather than client preferences that determine the frequency (or infrequency) of billing? Use the PMS to prepare pre-bills for all matters where set criteria apply whether these be agreed billing cycles high (or old) work-in-progress balances phases reached in the transaction and so on. Consider letting the fee earners turn these pre-bills into client invoices on-line perhaps with electronic workflow authorisation. An intuitive intranet enabled billing process could simplify this task. Where the PMS supports this notify fee earners by email immediately of any unpaid bills are of a certain age and/or a certain value.

Be aware of your competitors

Fewer clients will be chased by more law firms. How well are you servicing the needs of your client? Are there any added services you can offer? Could you provide extranet access to some of your clients’ data on the PMS? Would your client like regular progress reports on their matters? Where you have provided estimates would your client welcome regular comparisons of time spent against these estimates? Would your client like a more detailed bill to see exactly how time has been spent? Always assume that competitor law firms are trying to win your clients. Where could your client services be improved? Sometimes clients overlook the quality of the legal work performed in favour of more transparent client-facing services.

How well do you know your client? Do you keep an accurate history of contact with the client? Are you aware of their interests and issues? Do you include them on relevant personalised mailings and exclude them from irrelevant ones? A number of PMS solutions now include powerful client relationship management (CRM) modules that allow the firm to manage all aspects of the relationship in addition to providing the client with quality legal work.

When tendering for new business how well do you know the price constraints within which you can operate? More powerful PMS solutions can track true profitability as well as realisation and utilisation. If you can easily extract from the PMS the exact cost price of previous matters then you will be far better positioned to negotiate with prospective new clients.

The threat of a recession is an excellent prompt to look at some of the basic management strategies. Nothing I have described herein should come as a surprise – but it easy to lose sight of these basic principles when times are busy and business is booming. Prudent refocusing at this stage in advance of any downturn should produce benefits that will be useful whatever turn the economy takes.

David Thorpe is the general manager for Europe at Elite Information Systems International Inc. He can be contacted at One Royal Exchange Avenue Threadneedle Street London EC3V 3LT 020 7464 4040 or dthorpe@elite.com. Further information can be found at www.eliteis.com.