Reality check: How to risk-test strategic plans to grow your law firm

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Four things you will learn from this Masterclass:

1. What to include in your business case for growth

2. Why robust market, resource and financial analysis is key to success

3. When to build governance and risk management into the process

4. How to plan for and avoid pitfalls in the implementation phase

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The market has turned and opportunities for growth are on the leadership agenda across the professional services sector. Firms face an uncertain future with increasingly demanding clients, the war for talent back in force, new technologies disrupting traditional models and regulatory change driving greater market competition.

Now is the time to make key strategic decisions about how to grow your law firm over the next five years and beyond. However, it is essential that these decisions are made in a measured and fully informed way and subject to appropriate risk management. Investment is a scarce resource and this is no time for mistakes. Making the right decisions now on whether to expand, restructure, merge, acquire, integrate, diversify or consolidate will make the difference between the winners and losers in the market of tomorrow.

As Lee Everson, corporate director at Barclays Professional Services, notes: "we see significant opportunities for firms to grow in the changing economic and professional services market. The winners will be firms that make clear strategic decisions and execute change in a structured way - placing their investment after a robust review of strategic options."

A growth strategy being pursued by many law firms is to invest in new markets. Despite the digital age opening up new ways of working, this often means opening a new office - whether in another domestic centre or a new international market. Anyone who has done this before will know that it is no small task and will inevitably suck up management time. Leaders will be engaged in making decisions, recruiting new people and promoting the new office internally and externally. Business managers' time is likely to be stretched as they will be distracted from 'business as usual' activities and potentially from other business growth opportunities.

Andrew Cheung, general counsel at Dentons, has extensive experience of international growth. He says that, when executing a strategy of overseas expansion, whether by acquisition or organic growth, one of the issues that is easy to underestimate is the degree of complexity this expansion introduces into the organisation, along with the level of effort it takes to deal with this and keep overseas offices profitable, productive
and effective.

"These are huge ongoing commitments of senior level resource and investment in systems and controls," he notes. "Ignore these issues at your peril because it is far easier to lose money on these issues than make it but, if done properly, the upside potential is huge."

There is an opportunity cost here which must be acknowledged and weighed up against the expected benefits. So, before we throw ourselves in to the practicalities of how to open a new office, let's pause for thought and check that we are 100 per cent clear on why your firm is opening a new office.

The business case

It may sound obvious, but it is absolutely critical that your business case is prepared to articulate why the office is being opened. The first fundamental to be clear on is the link to the firm's business strategy and objectives. Are you seeking:

• growth by entering a new market
  (in the UK or internationally);

• to service existing clients from
  a cheaper location; or

• to follow your clients and support
  them in different jurisdictions?

The key here is to start from a clear understanding of what you are trying to achieve and to document it in a business case so that everyone is on the same
page from day one (see Figure 1).

1. Market analysis

Having established how the new office plans link to the firm's overall business strategy and objectives, the business case should include some basic analysis of the proposed new market. A SWOT analysis (strengths, weaknesses, opportunities and threats) of how the business would be positioned in the new market is essential. It is also a good idea to consider conducting a PESTLE analysis (political, economic, social, technological, legal and environmental).

Do not even contemplate a new market without a clear and, critically, honest assessment of the competitive landscape which considers:

• Who are your competitors?

• What is their market share?

• What is their USP?

• How can we compete?

The business case should identify clients and targets in the new market and the services that you are planning to provide
to them. This should, in turn, be linked to the assumptions in the financial appraisal (see below).

If your business case relies on assumptions about winning more from existing clients, take the opportunity to talk to them about this before you make any commitment to obtain new office space. Similarly, you can and should approach target clients as part of the business case phase. Ask them: "If we open an office in [jurisdiction], what would you be looking for to engage us?"

David Pester, managing partner at
TLT, which has in the past three years opened two 'greenfield site' UK offices
and merged with Scottish law firm Anderson Fyfe, says: "Listening to clients before you make any decisions is absolutely critical. It sounds simple, but if you don't structure your business around their needs, any expansion will just add numbers rather than real value to your business proposition."

2. People strategy

The war for talent is back. To maintain and build your firm's reputation, you must be confident that you are able to attract, retain and develop quality people in the new location. Of course, successful national or international expansion is itself brand enhancing, so this can be a virtuous circle.

You will need to identify people who are confident business developers, with the right leadership and management skills. It is important to be explicit about who these key people are and whether they are inside or outside of the firm.

Firms often follow a mix of hiring locally and seconding or transferring people from existing locations. Do you have trusted team members who would be willing to relocate? Are you clear on your strategy to entice the key players from competitors to join you?

Although it requires upfront investment, it is money well spent to get a 'market map' from head hunters as part of the business case. Detailed resource planning will help to inform both the project costs (hiring and transfer packages) as well as the ongoing operational budget. Without line of sight to the right people, your business case - and, fundamentally, your market proposition - will not stack up.

Comments Pester: "Cultural fit is as important as expertise and business development nous. Managing this can
be easier when starting a new office from scratch rather than the big bang approach of a large merger or acquisition; you just have more control. Being clear about what your values are and how you support each other and clients should flow through recruitment, induction, retention and reward. Anything less puts the project at risk".

3. Financial appraisal

It is really hard to do a budget for an office that doesn't exist. But, that is not an excuse to avoid doing one. There will be some one-off capital investment costs in year one, such as recruitment and relocation fees, lease costs, office refurbishment, marketing and promotion - that is the easy bit.

The tricky part is forecasting revenues and ongoing operational costs over, say, the next five years. Note that this is not just about adding to the top line; it must also
be about building a profitable business.
So, actual and allocated costs should
form part of the budget.

To address the uncertainty around assumptions, three key actions are recommended. First, prepare a sensitivity analysis - as well as the expected outcome, calculate the financial position if prudent assumptions are exceeded and, conversely, if predicted new business is slower to materialise or costs (e.g. salaries) are
higher than planned.

Second, be prepared to re-forecast. Some of your assumptions will turn out to be wrong, so the budget prepared at the business case stage should be re-forecast once more detailed planning has been completed.

Finally, it is important to be clear about what the payback period is likely to be on the investment and to monitor and report when the new office is expected to start generating profits.

"Opening a new office can be a great way to add revenues and grow profits,
but the time invested by management
should not be underestimated,"
comments Colin Wardale, director
of finance at Hill Dickinson.

"If you are establishing a new international office, you need to ensure plans build in time to clear regulatory hurdles and also manage significant accounting and tax complexity. Choosing the best local advisors you can find
is essential."

4. Risk management

Too often, firms see 'risk' as the final box to be ticked - dotting the 'i's and crossing the 't's. But, that is a dangerous approach.

First, the decision to open a new office needs to be taken in the context of the firm's risk appetite. This fits hand in hand with the need to link back to the firm's business strategy and objectives.

In simplistic terms, risk appetite is
the extent of willingness to take risks in order to meet strategic objectives. Opening a new office is inherently a big risk in itself - a risk which can have implications in terms of financial capital, human capital and business reputation. Businesses can only grow by taking risks, so the key is to ensure yours does so
with its eyes wide open.

Risk appetite is a complex subject but, as a minimum, the business case should be considered against the firm's willingness to accept risk in terms of earnings volatility, capital investment, human capital, reputation and regulatory standing.

Second, unless your business is extremely well practiced in new office openings, it is likely that this will be one
of your top ten business risks and, as such, it should be given an appropriate amount of management attention and
be subject to firm-level governance.

As a key risk, you should be clear where this fits on your firm's high-level
risk map in terms of likelihood and impact, and identify the key controls you are relying upon to mitigate it, including a 'plan B' if the new office falls behind schedule.

If you are looking for international expansion, there will also be legal and regulatory considerations that must be
fully investigated and addressed.

Comments Cheung: "The key to effectively managing risk in this process is to involve your risk management team as early as possible at the formation of strategy and documenting the deal. Anything else means firefighting - not just through the acquisition or establishment, but forevermore. In fact, the proper appreciation and assimilation of risk into strategic thinking should have the effect of opening up opportunities rather than closing them off."

Effective governance

Once the business case has been fully researched, it should be summarised in a short paper for presentation to executive management and the board, as follows:

I. Executive summary

II. Link to business strategy
and objectives

III. Analysis

IV. Business recommendation - 'go' or 'don't go'

The 'go' or 'don't go' decision cannot be taken lightly. As well as the cash cost of the new office, there is the opportunity cost of partner time, which should be priced in. Ask yourself: Is this the best use of these resources? Although a lot
of work will have been done up to this point, leaders should be prepared to
walk away if the business case does
not measure up.

The governance around this should be focused on substance, not form. In any business, there are multiple stakeholders to get on board and there is likely to be extensive communication and consultation with interested parties. It should not be the case of forcing something through sign-off by executive management and then the board. The emphasis should be on using the challenge around the board table to ensure the right decision is made in the interests of the firm's owners and other stakeholders.

This is where a non-executive director or similar external advisor can add real value. They should avoid being carried along by natural enthusiasm for a new venture and keep asking the basic questions 'why?', 'who?' 'how much?' and 'when?' to ensure the business case holds firm.

Successful execution

In addition to ensuring the strategic business case stacks up, the key
to winning in a new market is
successful execution.

Once the business case has been signed off, the next step is to invest in a decent project plan to take your firm up to launch and for, say, 12 months post-opening to embed the new office. This does not involve Gantt charts, issues logs and endless steering committees (unless you want it to), but, rather, structure about what needs to be done, by whom and by when.

Whichever way you choose to present this plan, there are multiple balls to keep in the air. As Pester notes: "the work really starts once the business case is complete or the deal is done. Implementation is the hard part. Everything from office space to internet connections have the potential to throw a spanner in the works; you need to be prepared and willing to be flexible. You also need to be realistic; things are never perfect from day one. Make sure you keep communicating with your people long after the go-live date so that they have a sense of where you're going and their role in getting you there."

Figure 2 provides a list of 40 areas that should be covered as part of your project implementation plan. The amount of work involved will depend on your firm's existing business as well as the nature of the new market, but you should address each of these areas in turn. Timelines
are always really difficult to estimate and often slip, so try to be clear in this critical path and realistic about how long things will take.

Paul Williams, head of agency at Bruton Knowles, offers a word of warning on timescales. "There is a general tendency to underestimate how long it can take to find suitable premises, and then how long it will take to agree and complete the lease and arrange fit-out to get to the point of being able to move in," he says.

"Despite a perception that 'there is plenty of office space out there', as always, once you start to narrow down the search and apply your criteria for size, location, budget and style, it can come as a big surprise how few feasible options there may be."

 

Although it is not essential to have elaborate programme/project management in place, it is important that there is absolute clarity on the following:

• who is accountable for the project;

• who the project is reporting to;

• how often it is reporting and against which objectives (financial and non-financial measures);

• key risks and how they are being managed; and

• when and how the firm's core processes, policies and working practices will be transferred to
  the new office.

A continuous journey

Whilst phase 1 of the expansion
project may close when the office is launched, this is the start, not the end
of the journey. The accountable executive
should continue to report performance against the key objectives of the business case to both executive management and the board.

Phase 2 of the project plan should include details such as marketing, events and milestone reporting. If the new office is a success, this will ensure key learnings can be replicated for future projects and, if it is not performing, it will enable senior management to take action.

Louise Fleming is an executive
director at Kingsmead Square
(www.kingsmeadsquare.com) and
was formerly risk partner, head of professional services and head of
the southwest region at Barclays' corporate banking division.