Strategic considerations

I ran a strategic planning day for a client this week and was surprised to see how little had changed in the last few years. Almost all the firm’s work is paid for in arrears, yet the costs are all up front. ?This firm runs a successful personal injury department ?but recognises the work currently in progress cannot ?be maintained, and that it will have to change when fixed ?fees are eventually introduced. 

The firm will have a substantial working capital gap when these changes begin. This can be masked in the short term as staff who have not been busy do longer hours, but eventually the partners will need to recruit more staff.

‘Overtrading’ is the most dangerous part of any economic cycle, and the legal sector will have to cope with it at a time when all the above factors are also in play. It is also likely that the recovery phase will be accompanied by increasing interest rates. Historically, interest rates have risen in a recession and fallen as the economy has recovered, so this time around the prospect of overtrading is daunting for heavily lent firms.

Internal politics are a critical aspect of any firm and some recent failures have been triggered by the departure of successful teams to rival firms where the partners believe they will be better rewarded. A key warning indicator is where a firm has a super-performing team in an otherwise average or poorly performing firm. For the last five years, that team will have stayed for fear of moving to somewhere worse. However, now we will see increasing mobility for partners, staff, and even whole teams trying to boost their rewards. 

Is it any wonder the sector is seeing more stress, including high-profile failures and ‘merger mania’?

But it is by no means all doom and gloom. The demand for legal services will continue, albeit that consumers of services have a different expectation from old-fashioned clients. 

Practice points

• Keep a tight control on the cash: good firms fail for a lack of cash, not a lack of profit;

• Understand the profitability and working capital cycle of the firm by department: some types of work need more finance for lock-up than others. Know which these are and watch the trends. Underperforming teams will create lock-up before you find out the cash is not coming through, but high-flying teams will create lock-up as they grow – can you tell the difference? React to the warning signs, not when the cash runs out;

• Have an agreed strategy for each department: it may be for controlled growth, to build a niche, or to groom yourselves to be acquired. Whatever the strategy, ensure all your partners have bought into it;

• Look after the staff: remember we buy and sell hours, so make sure you buy quality, motivated time. These hours are easier to sell than having unhappy, slow-working staff spending time on matters that cannot be recovered. The hardest thing in the next few years as the economy recovers will be finding and retaining good staff – beware the calls from the headhunters who will be after your best assets;

• Make good use of your IT investment: training is key, but so is the production of standard management reports that are easy to understand. Use graphs with clearly defined and achievable targets to show how you are doing;

• Market the services you offer: many firms rely on ‘clients’ to return time after time with new business. But now increasingly you have ‘consumers’ who are interested in the price – how are you attracting them and delivering a cost-effective service? 

• Keep your partners ?happy: they need to ?be motivated, involved, ?and driven to achieve. ?A super-performing partner in an underperforming firm is as much of a challenge for management as a poorly performing partner. Have brief, focused partners’ meetings to keep everyone up to date on key issues – the Solicitors Regulation Authority expects all partners to know what is going on;

• Don’t forget risk management: one ?badly done case will be remembered no matter how many good ones you do. The insurers are now looking closely at you;  

• Watch the competition: in a rapidly changing market, what are your local competitors doing and how are they reacting? Understand who is doing well and find out why. See who has not performed and absorb any lessons. Secret shopping can be invaluable to assist in these decisions. ?Do not be complacent;

• Plan for your succession: you must always be looking for the next generation of future owners. Whatever corporate structure you have decided on – partnership, limited liability partnership, or limited company – succession is the big challenge facing the profession.