Financial success in a tough economy:

“If you ain’t kicking hard enough, you ain’t making waves”

So, we’ve heard the theory, what about the practice? James Boyd, finance director at Cobbetts, gives a personal insight into its profitability drive, describing the strategy employed to improve profitability over a three-year period. Here, at the end of ‘Year One’, James considers the firm’s development so far, where it has focused its efforts and what results it has enjoyed over the course of the year. He uses that experience to give a glimpse into the firm’s next step – profitability through Year’s Two and Three.

It is easy to go with the flow of the legal market and progress, but to gain true sustainable growth and profitability, which puts you at the front of the pack, requires a change in thought. Standard practices and policies will allow your firm to run with the flow. To make waves, however, you need something more.

The essential framework and plan

At Cobbetts, planning began in spring 2000 to combat what was expected to be a hardening of the economy in autumn of that year. In order for the firm to achieve the growth it required, I felt the following points were fundamental:

A strong managing partner who had the vision and determination to drive the business forward;
Good quality finance staff to analyse and drive the changes through;
To fully utilise and truly develop the Practice Management System to deliver clear benefits that are aligned to client ‘tie-in’.

It was imperative that these three things were in place, as the project would have had no chance of success without them. Cobbetts had already been recognised for having responsible financial management for some years, but this needed to be taken further without having an adverse impact on the firm’s culture. Certain initiatives introduced during the last year have transformed the firm's ability to compete with the best and assisted in changing its perception in the marketplace.

To compete and gain competitive advantage, you have to find a way of unlocking profitability and cash to ensure the business grows more than that of your competition. A task made all the more difficult in a static marketplace.

The results

We have outperformed our competitors in a hardened economy over the last 12 months by reducing debt and work-in-progress lock up through adopting a three-year strategy that has already shown other significant results in Year One:

Significant growth in fees and profitability;
Significantly reduced debt and work-in-progress lock up;
Accelerated drawings to an extent that nearly all the years' profits are drawn in the year in which they are earned, and have still kept us in the black with the bank;
Created an impressive bonus fund for all staff to share in

Working capital

Cobbetts’ view is that cash is king in its truest sense. The cash derived from initiatives in the past twelve months has been split between partners in the form of increased drawings and reduced capital requirements, retaining and attracting senior fee-earners by paying the market rate, retaining staff loyalty by distributing a significant bonus and most importantly has created funds for investment in existing and potential new clients. We had to unlock the working capital, which is made up of work-in-progress, unbilled disbursements and debt, and turn this into cash.

To do this we had to review our terms of engagement to reduce the timescale and funding of each case held within the firm. This forced a complete review and tested long-held beliefs and working practices, but by achieving this, the firm will inevitably, by the culture created, improve service and quality levels and retain clients. Once you are on the cycle it is self-perpetuating as you will lock-in clients by further investment in good quality staff and working tools to achieve the growth in the static marketplace. If the process is managed correctly the firm will pay for itself and require no further capital investment by partners.

Making it work

To realise the benefits we wanted to achieve, it needed the combined efforts of everyone within the firm. We had to get away from the immediate reaction that the onus for implementation would fall on senior managers. This was overcome by using management reports by exception, a passive finance function and everyone taking a collective responsibility in dealing with what was expected of them

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What did we need to do?

To gain competitive advantage, we had to drive the business. This meant a push for greater efficiency, not to be confused with cost cutting, which tends to be the traditional accountant's response to such an economic climate. There had to be clear focus for measuring and dealing with performance and ensuring that behaviours met the strategy required; this was attained by using a scorecard system, which I will comment upon later. A change of culture was also required, as (despite significant benefits to be gained in Year One) the true growth would not be achieved until Years Two and Three. When considering this change in culture, we had to ensure that in everything we did there was a benefit both for the client and for Cobbetts. At no time could we advocate any changes that would benefit one at the expense of the other. It was essential that all the savings and improvements were re-invested to improve the service levels and tie-in clients, as well as providing benefits for partners and staff.

Efficiency drive

A large number of issues had to be tackled within the firm, in particular, cumbersome systems and procedures that had not been reviewed for some time. There were many comments, as one would find in any firm, that there were unnecessary authority limits, paperwork, procedures and that fee-earners were generally carrying the systems and support staff.

There were also issues that housekeeping was poor, meaning that items were not getting posted and without the capture we were also losing out on the recovery. Delays in time recording meant that records were inaccurate and management information produced on this basis was incorrect, leading to inappropriate decisions being made. There was inadvertent non-compliance as people were not clear what was required of them and what action was expected when financial information was distributed. There were some issues with IT facilities and staff members not having the tools and access to manage their work effectively.

Simpler for staff, easier for clients, more cost effective for the firm

An overhaul of all our systems and procedures was required to ensure that cases could be dealt with in a more free-flowing manner. We identified all the blockages and lifted the lids on these. In carrying out the review, we adopted the three simple principles above. It was imperative that we improved the speed of processing and reduced the resistance in getting the job done. To achieve these aims the following were introduced:

Electronic Matter Inceptions;
Electronic Disbursements;
Clear message to all fee-earners on what action is required on financial print-outs;
Exception Reports to reduce “trees” of financial information;
A move away from firm-wide, prescriptive reports to specific team reports that enabled more appropriate action;
Improved communication both in timescales and ease;
An increase in authorisation limits for getting disbursements on matters and getting cheques released;
Bringing forward billing earlier in the cycle of a case;
Improving the overall capture and recovery of time and disbursements;
Fee-Earner Desktop systems that would allow team managers to push down the responsibility to all fee-earners and encourage them to be more self-managing;
Instil the discipline to get information recorded promptly, especially in the light of web-based reporting for clients;
Get the system to produce bespoke reports for clients.

Focus

As with all initiatives, to ensure correct implementation and monitoring and adjustment where necessary, there had to be one clear, focused document to support our drive. On a monthly basis, we prepare a scorecard that is graphical and operates on a traffic light system – green if teams are achieving target, orange if they are within ten per cent and red if they are in deficit. The scorecard is split into three sections; fees and gross contribution to target, hours recorded and recovery of hours at the billing stage, and working capital funded by the firm, which is made up of work-in-progress, debtors and unbilled disbursements. This document is a succinct assessment of our performance and is broken down by the 19 teams within the firm. We have found that it is essential to clearly document our progress and have awareness across all levels of staff, so a copy of each month's scorecard is pinned up in each team area of the building.

The scorecard is backed up by an executive information system that fee-earners can use to easily look at fees, hours, profitability of clients and individual fee-earners. This system is also used as a measure to ensure that we get the behaviours we require. As finance director, I ensure that there are regular reviews of progress and these have underpinned the success we have achieved over the past 12 months. After each month end I have held a face-to-face meeting with each team manager where commitments have been made and then followed up rigorously to ensure we achieve the goals set.

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Throughout the year all staff are made aware of what is expected of them and what progress has been achieved. All reports returned by team managers are looked at in detail to identify training needs to ensure that there is continuous improvement in the development of all fee-earners and secretaries. Regular monitoring also ensures that any inadvertent non-compliant behaviour is identified and dealt with promptly. This also assists in providing feedback, so that we can continuously redefine areas of action and ensure that we improve on all fronts.

Culture

It has been vital that the change process has been managed and an awareness of it being efficient and effective created. In our teams there may be a ratio of one team manager to ten fee-earners, and to ensure that we have achieved the objectives set out we had to get fee-earners to be more responsible and report upwards. With ten people reporting to one who then passes that through to the management team, we have a far more effective reporting mechanism. Careful thought and preparation has ensured that all systems and procedures allow fee-earners to have access to all information to achieve this change in emphasis. This was coupled with the passive management referred to earlier. All team managers and partners had to endorse this new approach and devote time to it at the outset, realising that it would actually release time in the medium term and allow more free-flowing caseloads.

From a financial point of view, being more passive does not mean you lose control, as you can lift the lid on authority levels and responsibility and have some management control. However, this can be done ‘behind the curtains’ by reviewing exception reports of items that fall outside the standard terms of engagement for the firm.

The management culture at Cobbetts has also changed. Rather than pushing down information and asking for response, a level of management has been missed out. We ask: “You have access to all the information, what are the issues that need resolving?” This encouragement to get fee-earners to take responsibility has also meant that the Pareto 80:20 rule now applies, with most queries being dealt with at a very low level so that partners' time is not taken up with irrelevant queries.

To take the change in culture a stage further, our next initiative will be to review all terms of engagement across the firm. By getting this right at client/matter opening stage, we will ensure all issues throughout the case relating to the working capital initiatives of work-in-progress and disbursements are captured and recovered more effectively, and that we do not have problems with them or with overdue debt. We are constantly learning and adjusting these terms but they are the vital documents that complete the loop of opening a case and finally getting paid. We aim to reduce the length of that loop from an average of six months to three months.

Benefits for clients and Cobbetts

Less onerous – reduced paperwork and rework for lost slips and documents;
Better capture – reinvest savings to improve service even more;
Quality of information for all parties – better management, clearer assessments about the performance and profitability of clients and fee-earners;
Recoveries – there has been an underlying improvement of five per cent on the top line and directly in profits through carrying out this exercise;
Cash – £3 million has been created to reduce partners' funding in the business, improve drawings and has been passed on to staff in the form of the bonus and been invested in further tools to further allow improvement in client service and quality;
Reduced exposure – can give clear and accurate information and advice especially in a hardening economy;
Further cycles – this is not a one-off exercise in that it is a continuous and rolling series of improvements over a 3+ year period;
Easier to manage – for fee-earners, secretaries and team managers;
One point of contact – that someone is identified in the firm to champion this and follow-up all areas and ensure that all objectives are met and that we continue to learn as to where further improvements can be gained.

Year One of the exercise has seen significant improvements in profitability and in terms of cash and balance sheet financing. The aim in Year Two is to maintain this improvement and start to invest the sums realised and further drive the firm forward. This, it is hoped, will lead to true growth in Year Three, both in terms of fees from existing clients and attracting new business, as partners' time will be released by the improved management across both offices. Year One has been exceptional but the best is yet to come!

At Cobbetts we are making waves that will lead to truly sustainable growth.

James Boyd is finance director at Cobbetts. He can be contacted at james.boyd@cobbetts.co.uk