After the storm: How independent law firms can achieve competitive success

The changes ushered in by the Legal Services Act and pressures created by an economy in deep recession have driven a marked change in attitudes at partner level in the more enlightened UK law firms. Elsewhere in the sector, however, there remains a need for change. Faced by radical regulatory and competitive reform, many firms have had to grapple with commercial principles (perhaps for the first time), to ride out the storm and survive in the changing conditions.

We hear talk of an upturn and sustainable recovery may well be on the way, with the International Monetary Fund forecasting 2.9 per cent growth for 2014 and PwC predicting that the UK economy will overtake France and become the world's fifth largest by 2020. However, firms cannot be complacent and need
to think hard about how they can make
a real difference and thrive in the
years ahead.

Law firm partners wear three hats: practitioner, manager and investor. But how do they spend their time? Generally, the majority is spent practising, occasionally some time is set aside for management issues, and they tend to completely forget that they are investors. This is in stark contrast with most small to medium-sized businesses, which value and invest in management skills and are keen to measure the return on capital.

It's generally the case that law firms interact with clients on a transactional basis, with relationships centred on fee earners or partners rather than the firm as a whole. Internal referrals and robust client relationship management (CRM) processes are rarely embedded or as effective as they could be. So, what can firms do to ensure they achieve and maintain competitive advantage using clear commercial principles?

Let's fast forward to 2018 to a profitable, growing, independent and highly-regarded law firm that has made the journey and consider what the leadership team would have done to
forge success over those four years.

The six Cs

Looking behind the headlines of our hypothetical firm's track record, it's no surprise that its competitive achievements are based on a robust strategy and sound principles. Let's call them the six Cs: culture, communication, clients, capital, cashflow and collaboration (see Figure 1).

 

1. Culture

All the evidence suggests that a common theme for highly successful businesses is that it invests in creating, cultivating, managing and preserving a culture that adds integrity to strategy, creating an environment where staff and clients
are valued.

Culture gives a sense of identity; it drives understanding of what you stand for, how you do it and how it impacts on the client. If you develop the right culture, then clients will benefit.

Everyone in the firm should understand and be able to articulate
the culture of the business - ideally in
a sentence. The firm's culture should be built on shared values and the leadership team should take a zero-tolerance approach to those who do not hold to those values - whatever their status in
the firm. At its simplest, culture is 'the way we do things around here'. It's dangerous to underestimate the power of organisational culture; as management guru Peter Drucker said, "culture eats strategy for breakfast".

Our hypothetical firm has involved staff at all levels in the creation of a culture built around shared values. Internal and external messaging is couched in terms which reflect that culture. Suggestions and initiatives from junior lawyers, support staff and functional managers are encouraged and implemented when they are viable.

2. Communication

Business success demands leadership and teamwork, so communication is a vital part of our firm's armoury. It may feel like a bold step, but involving staff in developing strategy and sharing financial information with them can deliver real results. Understanding what the firm is trying to achieve can motivate and enable staff to play their part in driving efficiencies and increased profits.

All the partners in our winning firm are very visible, both inside the firm and outside in the community and in their professional circles. They all know that the firm needs to have a strong, positive profile and that they each have an important role as the face of the firm.

Marketing is not a poor relation in
the firm and everyone from top to bottom
is contributing in one way or another to
the marketing mix. Our firm's leadership team decided some time ago to harness
the enthusiasm of junior staff by encouraging them to take the lead on
social media content.

3. Clients

Excellent client service lies at the very heart of our winning firm, where each client interaction is seen as an opportunity to satisfy individual needs and to build real client loyalty, standing on its head the old approach of viewing each case as a transaction that will be conducted solely on the practitioner's terms.

Our successful firm knows that satisfied clients will recommend the firm to others and, as such, are a vital part of the business development jigsaw. Indeed, it goes a step further by actively asking satisfied clients for referrals and introductions.

By focusing on clients and serving their needs, the firm has been able to come up with innovative solutions that give it a competitive advantage. It devises imaginative pricing structures and payments options. It uses fact-finding at the start of the job to get to the heart of what the client wants, both now and in future, and it uses that information to meet other client needs at different points in the lifetime of the individual or business. Importantly, the firm is using CRM to ensure proactivity.

As a mid-size independent, the firm recognises the competitive challenge coming from those new players who entered the market back in 2015. It knows it must take customer care and service standards seriously, and monitor client experience in a structured way, such as through accreditations like LawNet's Excellence Mark (which involves mystery shopping and online customer surveys) or the internationally-recognised ISO 9001 quality standard as a route to improving client experience and ensuring differentiation.

4. Capital

A strong financial footing is another marked differentiator between small businesses
in the commercial and legal sectors.
Most law firms today are undercapitalised
in relation to the income they generate
and the working capital they need in
order to function.

The level of investment in clients can demand huge levels of lockup. Imagine a balance sheet, with the capital at the foot of it, and allow yourself to picture the balance sheet as a building with the capital as the foundations holding it up. For many law firms, the level of capital available makes for a house built on stilts.

For the new competitors that started to enter the market back in 2013, reinvesting profits is second nature. They don't have the tax issues of the traditional partnership model, nor the burden of succession planning (which combine to act as disincentives to retaining profits and building capital), and they're determined to plough money back into the business to finance growth and improvements.

The partners in the successful law firm of 2018 recognised early on that capital and cashflow are the factors most likely to cause a rocky ride. To compete with the new entrants, the firm decided on a policy of profit retention, making it less dependent on borrowed money and
able to invest in growing its capacity
and capabilities.

Maximising the value of IT should be the mantra of every law firm. Big-ticket purchases such as practice management software should exploit the huge power on offer - it's not just about supporting financial management; it can also feed the sales process and be used to reward staff performance. Our firm of 2018 realised that, as well as bringing efficiencies, some IT applications (such as online document preparation) can also allow some work to be outsourced to clients.

Our successful firm uses financial benchmarking to sharpen up and see where its performance can be improved. There's a LawNet benchmarking survey each year, which allows like-for-like comparisons against firms of a similar size, operating
in a similar environment and to similar standards. Other options include the
annual Law Society financial benchmarking survey, which gives an industry-wide picture. Other advisers, such as accountancy
firms and banks, can also play a part in improving financial health and produce benchmarking reports.

5. Cashflow

The partners at our top-performing firm also hold a very tight rein on cashflow. Everyone submits bills every day as matters or tranches of work are completed, which keeps the money flowing. Invoices are emailed and seven-day payment terms are the norm.

Our firm realised, as the UK economy emerged from recession in 2013/14, that professionals were just as likely to face cashflow pressures in an economic recovery as they were in a downturn. As they got busier, they needed to invest more in work-in-progress and debtors. They noticed that many of the high-profile law firms that failed in 2013 were profitable
but ran out of cash.

6. Collaboration

Too often in the past, firms have kept their eyes and ears closed to the world outside, fearful that too much dialogue with other firms or organisations might disadvantage them competitively, or even make them feel vulnerable to change or to new competitors. Our firm realised, however, that there was value in being open to learning and willing to seek out external help and ideas.

Member groups, networks and franchise operations can all be valuable sources of help, support, best practice and buying power. A few new member groups and networks emerged around the time of the Legal Services Act, each with its own angle and target firm type.

LawNet was already 25 years old in 2014, and I'd like to think that our fictitious firm decided to join it around then to benefit from member services that would be unattainable for firms on their own, ranging from group insurance and free CPD training on member-driven topics through to ISO quality accreditation. The non profit-making model also attracts, enabling firms to retain their independence, while learning from each other and sharing their experiences.

Time will tell whether the economic recovery will fulfil its current promise, but solicitors may have a brighter outlook than at any time since 2007. Success in the years to come will be determined by the way that they tackle the business issues. That means putting clients at the heart of the business, embracing IT, finding more efficient ways of working and, critically, working cooperatively and collaboratively within and outside of the firm.

Chris Marston is chief executive of law firm network LawNet (www.lawnet.co.uk). He was previously head of professional practices at Lloyds Banking Group.