In spite of the well-publicised drawbacks of charging by the hour – that the incentive is for firms to spend as long as possible on a particular matter; that fees are largely divorced from the value delivered; and that it promotes the long-hours culture that still dominates the profession – most lawyers have been slow to embrace change. The forthcoming changes in the market will provide the kickstart that many firms need, albeit perhaps too late for some.
Delivery
Some of the larger firms have started to accept the need for new billing practices, but even this has been limited. In any case, this is merely the tip of the iceberg. Firms throughout the market will need to fundamentally alter their processes and methods of delivery, in order to compete with providers well-versed in the commercial imperatives of efficiency and low-cost service provision.
Valuable Services
Establishing the value of services provided without the aid of hourly rates, and away from the simple ‘cost-plus’ mentality prevalent in some areas, will not be an easy task. However, firms must be able to demonstrate clearly the value they bring to their clients, and it will not necessarily be a simple question of price competition. Quality of service and relationship management will also be crucial ingredients in the value proposition.
That said, there will also be areas in which competition will necessarily be with low-cost providers, and firms that cannot compete in terms of efficiency will not survive long. This is something that needs to be tackled now, not as and when the issue arises.
A Different Approach
It will not be enough to change processes or look to compete in areas other than price – differentiation will be at the heart of the new market. Firms that do not know how to market themselves and their brand, to existing clients as well as to prospects, will lose out and will be waving goodbye to more than their old timesheets.
Wednesday, 30 September 2009
Tuesday, 29 September 2009
Getting the Right Cost Structure: First Steps
As the economy starts to emerge (slowly) from recession, it would perhaps be understandable if managers took the opportunity to return to ‘business as usual’. But in the new legal market, there will be no ‘business as usual’ – firms need to wake up to the new commercial reality, and accept that their business model has to emphasise efficiency and profitability.
The issue of costs in law firms is complicated, and I shall be returning to the subject in the coming weeks to give further opinion – but getting your cost structure right, measuring returns and spending wisely is an absolutely essential part of the approach.
Structures
Broadly speaking, law firms can be described as ‘fixed cost operations’. In some areas these costs can be made more variable, using flexible contracts and outsourcing arrangements, but on the whole there is little room for change in the main outgoings. These costs can be broken down into staff costs, property, IT, professional indemnity, marketing, and ‘other’ (including, unfortunately, write-offs).
People
Without doubt, a law firm’s most substantial outgoings are people-related – salaries, bonuses, drawings, and related taxes. It therefore follows that, as difficult as it may be, the most substantial savings will also be people-related. The tough decisions must be taken early and openly, as remaining staff must be kept ‘on-board’. It may be possible to keep some people on part-time, but your cost structure absolutely must fit with your income profile – and if this means fewer property or commercial fee earners, then this is unfortunately the new market reality. By the same token, there will be potential growth areas that ought to be considered for expansion. Improving profits is not just about cutting costs, and firms must be prepared to invest where it would make commercial sense.
‘Other’
Once the big potential savings have been identified, and action taken to get the ball rolling (bearing in mind that severance costs will create a short-term hole in the cash flow), then other less substantial outgoings can be considered. Major savings can be made by reassessing the firm’s property requirements (especially if there are now a few more empty desks), refocusing marketing efforts on existing clients (see below), and even through some mild investments in technology.
Where the Money Is
However tough the decisions will be, the firm’s survival prosperity while upturn gradually reappears will depend upon swift and decisive action – and a determination to ‘go where the money is’, focusing on the most substantial potential savings, emphasising returns on outgoings and flexibility where possible.
The issue of costs in law firms is complicated, and I shall be returning to the subject in the coming weeks to give further opinion – but getting your cost structure right, measuring returns and spending wisely is an absolutely essential part of the approach.
Structures
Broadly speaking, law firms can be described as ‘fixed cost operations’. In some areas these costs can be made more variable, using flexible contracts and outsourcing arrangements, but on the whole there is little room for change in the main outgoings. These costs can be broken down into staff costs, property, IT, professional indemnity, marketing, and ‘other’ (including, unfortunately, write-offs).
People
Without doubt, a law firm’s most substantial outgoings are people-related – salaries, bonuses, drawings, and related taxes. It therefore follows that, as difficult as it may be, the most substantial savings will also be people-related. The tough decisions must be taken early and openly, as remaining staff must be kept ‘on-board’. It may be possible to keep some people on part-time, but your cost structure absolutely must fit with your income profile – and if this means fewer property or commercial fee earners, then this is unfortunately the new market reality. By the same token, there will be potential growth areas that ought to be considered for expansion. Improving profits is not just about cutting costs, and firms must be prepared to invest where it would make commercial sense.
‘Other’
Once the big potential savings have been identified, and action taken to get the ball rolling (bearing in mind that severance costs will create a short-term hole in the cash flow), then other less substantial outgoings can be considered. Major savings can be made by reassessing the firm’s property requirements (especially if there are now a few more empty desks), refocusing marketing efforts on existing clients (see below), and even through some mild investments in technology.
Where the Money Is
However tough the decisions will be, the firm’s survival prosperity while upturn gradually reappears will depend upon swift and decisive action – and a determination to ‘go where the money is’, focusing on the most substantial potential savings, emphasising returns on outgoings and flexibility where possible.
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